Oil falls below $49

Rising U.S. crude stocks and signs of slowing global demand growth weigh on prices.

May 12, 2005: 10:45 AM EDT


LONDON (Reuters) - Oil dipped below $49 on Thursday as a strengthening U.S. dollar extended a heavy fall driven by rising U.S. crude stocks and signs of slowing global demand.

U.S. crude for June delivery fell $1.50 to $48.95 a barrel. Shortly after the price climbed back above $49. Thursday's slide followed a drop of more than $1.60 a barrel, or 3 percent, on Wednesday. Prices are roughly around 15 percent below the record-high of $58.28 struck in early April.

London's Brent crude oil dropped $1.04 to $49.03 a barrel, hitting its lowest level since March 1.

Prices fell as the dollar hit a three-month high against the euro at $1.2699, extending gains made on a narrower trade deficit and a strong retail sales report.

Falls in the dollar's value this year and last have helped lift oil prices, by insulating non-dollar economies from the impact of higher oil prices. Investment funds have also switched from treasury markets into commodities and energy.

Further gains in the dollar could place more downward pressure on oil, traders said.

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"It depends largely on what the U.S. dollar does. If the euro weakens to around 1.25, I think the funds will liquidate further length in oil," said Tony Machacek of Bache Financial in London.

Oil's Wednesday slide came as the government said heavy imports pushed crude oil stocks in the U.S., the world's top energy consumer, to a six-year high last week.

Inventories rose by 2.7 million barrels to 329.7 million -- a 12th rise in the past 13 weeks and are now 30.3 million barrels higher than year-ago levels, the Energy Information Administration (EIA) said.

Slowing growth
Sentiment was also dampened by a report from International Energy Agency (IEA) saying that high fuel prices were slowing oil demand growth in key markets China, Europe and the United States.

First-quarter demand growth in the U.S. slowed to 250,000 bpd, or 1.2 percent, from 340,000 bpd, the IEA said.

China's demand growth slackened to 4.5 percent in the first quarter of this year from 19.3 percent a year ago. The West's energy watchdog trimmed its annual China demand growth projection by 30,000 barrels per day (bpd) to 470,000 bpd.

"That would put more pressure on prices, particularly the downward forecast on Chinese demand. China has been the prime driver of global rise in consumption over the past year or so," said Daniel Hynes, at ANZ Institutional Banking.

Some said the EIA's report of a mild rise in weekly U.S. gasoline stocks of 200,000 barrels, ahead of the summer driving season, could limit further losses.

"The key was lower-than-expected production. Refiners are coming back from maintenance significantly more slowly than expected and East Coast refiners look to be having problems maintaining their light product yields," Paris-based SG Commodities said in a report.