Oil: Demand growth stumbles

Oil ebbed to a five-week low around US$68 on Thursday on signs that high energy costs were firing inflation and dampening demand in top consumer the United States.

Commodities, stock and bond markets reeled on Wednesday after the United States reported a steep rise in consumer prices last month, driven by a big jump in fuel costs.

While other financial markets steadied on Thursday, US crude continued to fall. By 1528 GMT US crude was down 14 cents at US$68.55. London Brent was down 27 cents at US$68.77.

Oil has been in decline since hitting an all-time high of US$75.35 on April 24. Some investors say the drop is no more than a pause for breath in a rally that has lifted the cost of a barrel of oil from US$20 at the start of 2002.

"I certainly think the current jitters are no more than an overdue correction and pause for breath, and the bull market has plenty of years in it yet," said Mark Mathias, chief executive of London-based investment specialist Dawnay Day Quantum.

Commodities from aluminium to zinc have soared this year as investment money has poured into the market in search of higher returns than stocks or bonds offer. When a sell-off came this week, oil escaped relatively unscathed.

Since Friday, US oil prices have fallen nearly US$4, or around five per cent, while gold is roughly six per cent below a 26-year high and copper has fallen nearly 10 per cent since last week's record high.

Olivier Jakob, an analyst at Petromatrix, said oil had been driven higher by real and feared supply disruptions in Iraq, Nigeria and Iran. Only a drop in demand would halt the rally.

"Inflationary pressure is reducing consumers' disposable income and is now translating for the first time in many months into demand warning signs," he told Reuters.

In the world's third-largest oil consumer Japan, a Reuters poll showed on Thursday that high oil prices were putting a squeeze on company profits, with firms struggling to pass on energy costs to consumers.

"I think the primary factor (for oil) has been the cut in demand forecasts," said Kevin Norrish, an analyst at Barclays Capital. "Metals are much more sensitive to (inflation) data, which you can see if you look at how much copper is off."

Rising US petrol stocks have allayed concern that the United States -- consumer of 40 per cent of the world's motor fuel -- could struggle to meet peak summer demand.

Petrol futures in New York fell further after leading oil lower on Wednesday when US government data showed domestic motor fuel stocks gained 1.3 million barrels last week on high imports, the third week of rises.

US demand for crude and petroleum products in April fell 1.5 per cent year-on-year, with high pump prices cutting petrol use by 1.9 per cent, industry figures showed on Wednesday.

"US policies aimed at more use of alternative motor fuels like ethanol in the face of soaring petrol prices are also behind weaker crude prices," said Koo Cha-kwon, head of global oil research at Korea National Oil Corp. (KNOC).

US Senate Democrats on Wednesday offered a plan to cut US oil import dependence 40 per cent by 2020 by requiring more use of alternative motor vehicle fuels such as ethanol. (Additional reporting by Park Sung-woo in Seoul)

- REUTERS