Oil slides as dollar gains ground against other currencies

The Associated Press ,  New York   |  Wed, 04/02/2008 6:42 AM  |  Headlines

Oil futures extended their slide Tuesday as the dollar gained ground, making commodities such as energy futures less attractive to investors seeking a hedge against inflation. But trading was choppy as a debate among investors over oil's direction played out in the marketplace.

Retail gas prices, meanwhile, slipped slightly from the record they set one day earlier.

Investors who previously bought commodities such as oil as a haven against inflation and a falling dollar sold Tuesday as the greenback strengthened against the euro and other currencies. The stronger dollar also made oil more expensive to overseas investors.

Many analysts say oil investors have taken most of their price cues in recent months from gyrations in the dollar.

"The dollar's stronger, and (therefore) oil's weaker," said Brad Samples, an analyst with Summit Energy Services Inc., in Louisville, Ky.

Light, sweet crude for May delivery fell 60 cents to settle at $100.98 a barrel on the New York Mercantile Exchange after earlier falling as low as $99.55. Oil futures fell $4.04 a barrel on Monday.

But oil prices surged as high as $102.55 at times Tuesday as the early dip below the psychologically important $100 level drew buyers betting that high demand will give crude prices room for a further advance. Many large funds that invest in commodities such as oil craft strategies for their traders to automatically buy when prices fall to what they consider key support levels.

The strategies are based on a theory that global demand for oil supports higher prices, despite falling demand and higher supplies in the U.S.

"There's a lot of technical support down below $100," said Phil Flynn, an analyst at Alaron Trading Corp., in Chicago.

Tuesday's oil price uncertainty reflects a debate among investors over oil's future direction. Many analysts believe dollar-induced buying has driven oil prices far beyond levels that can be justified by supply and demand or economic conditions. The second quarter of the year, which began Tuesday, typically sees the lowest petroleum demand. The country's appetite for oil and gasoline have fallen sharply since January, and oil supplies have mostly risen in recent weeks.

But other investors see continued strong demand for oil and fuel from China and India as a sign that oil prices have further to rise, despite demand and supply dynamics in the U.S.

"They think that $99 and $100 oil is on sale," said James Cordier, founder of OptionSellers.com, a Tampa, Fla., trading firm.

Indeed, Cordier notes that previous dips below the $100 level over the past month have been quickly followed by rallies. Oil settled below $100 only once in March, after reaching that milestone for the first time in February.

Soaring crude prices have sent fuel prices higher, despite the fact that the high cost of gasoline has depressed demand. At the pump, the national average price of a gallon of gas slipped 0.1 cent Tuesday to $3.286 a gallon, according to AAA and the Oil Price Information Service. While that's a slight retreat from Monday's record, gas prices remain 60 cents higher than a year ago, and are expected to rise as high as $3.50 or $4 a gallon this spring as suppliers stock up in advance of peak summer driving season.

Executives of the five biggest private oil companies were called to task for high prices by Congress Tuesday. But while the executives said they realize high fuel prices are hurting consumers, they said the $123 billion they earned last year in profits was in line with other industries.

Other energy futures were mixed Tuesday. In other Nymex trading, May heating oil futures fell 2.64 cents to settle at $2.8797 a gallon while May gasoline futures rose 1.21 cents to settle at $2.6392 a gallon. May natural gas futures fell 37.7 cents to settle at $9.724 per 1,000 cubic feet.

In London, May Brent crude fell 13 cents to settle at $100.17 a barrel on the ICE Futures exchange. (***)

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