Oil: Weaker US demand tugs crude downward

LONDON - Oil slipped further on Friday as high fuel costs fired US inflation to its biggest gain in more than 25 years and energy demand continued to slow in the world's biggest consumer.

Europe's monetary affairs commissioner said high fuel costs had cut the bloc's economic growth and Saudi Arabia's new king expressed his concern about red hot prices that were causing "tremendous damage" to some countries.

Economists have been trying to fathom how far record high oil prices will crimp demand among the world's big consumers and the market is sensitive to each new set of economic data.

News from the United States that consumer prices shot up an unexpectedly large 1.2 per cent last month on the back of high energy costs sent US crude down to US$62.69 a barrel, down 48 cents. London Brent crude was down 79 cents to US$59.35.

These figures, and Thursday's data showing weakening US fuel demand, overshadowed forecasts for a rebound in consumption next year and doubts the world's oil refiners would be able to churn out enough fuel. Six US plants are still shut after hurricanes lashed the Gulf coast and US crude output is at its lowest level since World War Two.

"Meeting such anaemic demand looks like a manageable task," analysts at SG Commodities in Paris said.

The cost of US crude has fallen a long way from its late August record of US$70.85, after Hurricane Katrina plowed into US oil facilities, but prices are still at levels unseen in real terms in a quarter of a century.

European Monetary Affairs Commissioner Joaquin Almunia said high fuel costs had cut euro zone growth by 0.3-0.4 percentage points, but he added there were signs of economic recovery.

"So far...we are not seeing a transmission of the impact of higher oil prices to all prices and costs so an inflationary process is being avoided," he told Reuters in Salamanca, Spain.

Saudi Arabia's King Abdullah, in his first interview since coming to power, said the world's biggest oil exporter was working to trim prices.

"Without a doubt, we have benefited financially but we believe that the damage to other countries is tremendous and we don't believe prices should be at this level," the king said, according to excerpts of a US interview to air Friday.

US holds key

The United States is key to the world's delicate supply-demand balance at the moment and analysts are dissecting each set of US stock and consumption data.

Figures released on Thursday showed US petrol demand was down 2.4 per cent in the past four weeks compared with the same period last year. Consumption of distillates, including winter heating oil, dropped four per cent.

Fuel stocks fell, a consequence of storms that have caused massive disruption to refinery production.

"While stocks once again saw significant draws, the market's focus is currently set on seemingly weaker demand," said Citigroup analyst Doug Leggate in a report.

Not all analysts were convinced by the demand figures. Barclays Capital said demand was calculated using export estimates that could prove to be overstated.

"The market is tending to concentrate on the implied demand numbers to the exclusion of everything else, and that approach will miss the true size of the supply gaps that have been opened up," the bank said in a report.

Oil prices have traded between US$60 and US$70 for the past two and a half months.

"We continue to view near-term sector weakness as more opportunity than risk as we head towards winter," Leggate said.

As of Thursday, just under 10 per cent of US refining capacity remained shut -- down from a peak of 25 per cent after Hurricane Rita -- along with 67 per cent of Gulf of Mexico oil production.

- REUTERS