Oil: Inflation concern causes drop

Oil prices fell below US$69 a barrel on Wednesday, on concern that high prices were feeding inflation and potentially slowing the economy.

US June light crude oil settled down 84 cents at US$68.69 a barrel after trading as low as US$68.20, the lowest level since April 13. London Brent for July delivery gave up US$1.04 to settle at US$69.04.

US data on Wednesday indicated that the high cost of raw materials was pushing up the cost of living.

Core consumer prices rose 0.3 per cent in April, higher than the expected 0.2 per cent rise and rekindling inflation worries. Just a day earlier, those worries had been calmed by benign producer price data.

"What you have seen clearly is a surge in inflation expectations," said Frederic Lasserre, head of research of SG CIB Commodities after the consumer price data. "More and more households are anticipating inflation will increase." US oil inventory data contributed to the drop on Wednesday as petrol stocks rose even though refinery utilisation fell.

Petrol stocks increased 1.3 million barrels last week, less than expectations for a 1.6 million barrels rise. But refiners only used 89.8 per cent of their capacity, down 0.4 per cent on the previous week.

The data "is telling us that despite the fact that refinery runs decreased a little, refineries were still able to increase petrol stocks and that is a bearish signal for petrol," said Addison Armstrong, Manager of Exchange Traded Markets at TFS Energy in Stamford, Connecticut.

Petrol futures HUc1 in New York fell 5.10 cents to settle at US$1.9751 a gallon. Record pump prices have slowed US petrol demand so far this year to 0.3 per cent, compared to the normal 1.5 to 2.0 growth seen in recent years.

A separate report from the American Petroleum Institute on Wednesday showed US petrol demand fell 1.9 per cent last month from April, 2005, with overall oil demand off 1.5 per cent.

But some analysts said oil market fundamentals look tight in the third and fourth quarters, and investors were unlikely to shorten positions much ahead of the hurricane season.

Hurricanes last year caused major disruptions to US oil production in the Gulf of Mexico, and the sector has yet to recover fully.

The Organisation of the Petroleum Exporting Countries on Wednesday trimmed its forecast for global oil demand growth in 2006 by 60,000 barrels per day (bpd). The producer group still forecast strong annual demand growth of 1.4 million bpd, fueled by rapid expansion in China and expectations of a pick up in US demand later this year after a slow first quarter.

IRAN SMOLDERS

Iran's President Mahmoud Ahmadinejad on Wednesday rebuffed the latest attempt by the European Union to ease the international dispute over Tehran's nuclear ambitions.

"They say we want to give Iranians incentives but they think they are dealing with a four-year-old, telling him they will give him candies or walnuts and take gold from him in return," Ahmadinejad told a crowd in Iran.

Britain, France and Germany offered incentives aimed at inducing Iran to freeze its nuclear enrichment programme.

Concern over possible disruptions in oil exports from Opec's second-largest producer have helped drive prices to record highs this year.

"The market is still bullish in the medium and longer term," said Tony Nunan, assistant general manager of risk management at Mitsubishi Corp.

"We are not out of the woods yet as far as Iran's nuclear issue is concerned. And also the US petrol situation is still not clear." Any disruptions in Iran's crude oil exports can be covered for more than four years by the 26 countries that belong to the International Energy Agency, a US Energy Department official said on Tuesday. But such a drawdown would leave IEA nations with no stocks to counter any other supply outages.

- REUTERS