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Oil drops to near $108 ahead of key demand reports

business Updated: Apr 12, 2011 10:48 IST

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Oil prices slumped to near $108 a barrel on Tuesday in Asia, extending losses from the previous session ahead of key reports on the impact of rising fuel costs on global crude demand.

Benchmark crude for May delivery was down $1.64 at $108.28 a barrel at midday Singapore time in electronic trading on the New York Mercantile Exchange. The contract lost $2.87 to settle at $109.92 on Monday.

In London, Brent crude for May delivery was down $1.51 to $122.47 a barrel on the ICE Futures exchange.

Investors later Tuesday will be closely watching the latest reports on global crude supply and demand from the Organization of Petroleum Exporting Countries, the International Energy Agency and the Energy Department's Energy Information Administration. MasterCard SpendingPulse also will release its latest survey of retail gasoline demand in the US. Some analysts predict the recent surge in crude prices will cut consumer spending, undermine economic growth and hurt fuel demand, which will eventually push oil back below $100.

"Rising petrol costs will dampen consumer demand and may trigger rate hikes by some central banks," Capital Economics said in a report. "Partly because of this, we expect oil prices to drop back toward $85 per barrel by year-end." Crude has fallen about 5 % since touching $113.46 during trading early Monday after soaring 34 % from mid-February.

Much of the recent oil price run-up has been spurred by the fighting in Libya, which has taken almost all of the OPEC nation's 1.6 million barrels a day of crude production off the market indefinitely. On Monday, Libyan rebels rejected a cease-fire proposal by African mediators because it would leave Moammar Gadhafi in power.

However, no other country's oil supplies have been disrupted by the political uprisings in the Arab world this year, and some observers say the threat to supplies in the region has been overblown.

"The risk premium being added to current oil prices by the market due to unrest in the Middle East and North Africa has been overstated," said Richard Soultanian of NUS Consulting. "The gap between underlying fundamentals and energy market pricing is expanding to unsustainable levels."

Oil companies are poised to benefit from the price spike. Chevron Corp. said on Monday that it expects to post a higher profit in the January-to-March period than it reported for the previous quarter when it announces results on April 29. In other Nymex trading in May contracts, heating oil fell 3.7 cents to $3.22 a gallon and gasoline dropped 2.6 cents to $3.17 a gallon. Natural gas futures were up 0.3 cent at $4.11 per 1,000 cubic feet.