Oil: Prices fall on worries demand could flag

NEW YORK - Oil fell more than a dollar on Friday after two widely watched reports signaled that soaring energy costs were buckling consumer confidence and curbing global fuel consumption.

The International Energy Agency said it was cutting its global oil demand growth forecast due to high prices, while the University of Michigan said in its survey of US sentiment that near-record petrol prices pushed consumer optimism to its lowest point since Hurricane Katrina.

"It's becoming increasingly clear that the price is having quite a strong effect on demand growth," said Lawrence Eagles, head of the IEA's Oil Industry and Markets Division.

US light crude CLc1 dropped US$1.28 to US$72.04 a barrel, slicing away some of this week's US$3-plus gains, while London Brent crude LCOc1 lost US$1.11 to US$72.32 a barrel.

In a report on Friday, the IEA said high prices were having an impact on fuel use and cut its 2006 forecast for demand growth by 220,000 barrels per day (bpd) to 1.25 million bpd.

The agency, which advises 26 industrialized nations, also lowered the world's requirement for Opec oil by 200,000 bpd to 29.2 million bpd for the year.

IEA's Eagles said the overall crude market remained tight, though concerns about strained petrol supplies ahead of the US peak summer driving season should ease as refiners crank up activity.

Meanwhile, the University of Michigan's closely watched sentiment survey slumped to 79.0 in May from April's final 87.4, far below the median Wall Street forecast for a reading of 86.1 -- stirring worries that Americans may curb discretionary spending in the face of US$3 petrol.

"If sentiment stays at this level -- it might even decline further -- you should expect a serious slowing in second quarter and third quarter consumption," said Ian Shepherdson, chief US economist with High Frequency Economics.

Some analysts added that growing US inventories were also weighing on prices. The US government reported on Wednesday that petrol stockpiles jumped more than expected due in part to a surge in imports and an increase in refinery activity.

"There has certainly been more bearish news in the market this week than bullish, so today's sell-off was to be expected," said Peter Beutel, analyst at Cameron Hanover.

Traders have said the rally earlier this week was driven by gains across the commodities complex and technical strength as much as by news and that prices could remain volatile and directionless as speculative funds dipped in and out of the market.

"If it started to move towards US$50, that would be a big deal, or towards US$100, then we'd start to worry about inflation, but a dollar move in this market is irrelevant," one trader said.

The price for US crude hit a record of US$75.35 in April, driven by tensions over Opec producer Iran's nuclear ambitions and the shut in of around a quarter of output from Nigeria.

Tension had eased in Nigeria following the release of three foreign oil workers who had been taken hostage, but it mounted again on Friday with renewed threats of militant violence.

The Movement for the Emancipation of the Niger Delta (MEND) said in an email to Reuters that it was conscious of the potential that an attack on the Nigeria Liquefied Natural Gas plant could hurt nearby communities. It said it would launch a warning raid on an oil facility beforehand.

- REUTERS