Expected Supply Growth Lowers Oil Prices

By: AP
By: AP

NEW YORK (AP) -- Oil prices fell more than $3 a barrel Tuesday as the market absorbed data showing demand is falling even as supplies are rising. Meanwhile, gas prices inched higher at the pump, continuing their record-breaking press toward $4 a gallon.

A monthly Energy Department report said demand for finished petroleum products dropped 8.5 percent in February from January, and demand for gasoline fell by 6.2 percent. Though some of that drop can be attributed to February's being a shorter month, it still suggests high prices are cutting American's appetite for fuel.

"That's a dramatic drop," said Linda Rafield, senior oil analyst at Platts, the energy research arm of McGraw-Hill Cos.

At the same time, a British refinery strike that raised concerns about supplies ended Tuesday, and analysts surveyed by Platts expect the Energy Department's weekly inventory report on Wednesday to show domestic crude supplies rose last week.

"The two combined (rising supplies and falling demand) do not bode well for $120 oil," Rafield said.

Light, sweet crude for June delivery fell $3.12 to settle at $115.63 a barrel on the New York Mercantile Exchange, oil's lowest settlement since April 17.

A stronger dollar gave investors another reason to sell crude Tuesday. Commodities such as oil are less effective hedges against inflation when the dollar is gaining ground, and a stronger greenback makes oil more expensive to investors overseas. Analysts believe oil's run from $65 a year ago to a record near $120 yesterday has been fueled in large part by the dollar's protracted decline.

Energy investors will be closely watching the Federal Reserve's decision on interest rates Wednesday; analysts believe a quarter percentage point rate cut is already factored into the oil market. A decision to hold rates steady could further strengthen the dollar, sending oil prices down. But because rate cuts tend to weaken the dollar, a larger than expected rate cut could send oil to new records over $120.

The market will also be keeping a close eye on Nigeria, a major U.S. supplier of oil, where a work slowdown and militant attacks have cut production.

"Nigeria's always a factor in oil prices, it's always had an ongoing issue with oil outages, but we're seeing a bit of an increased activity in militant attacks," said Mark Pervan, a senior commodity strategist at the ANZ Bank in Melbourne, Australia. "They'll keep a high floor on the price."

At the pump, the national average price of a gallon of unleaded gas rose 0.4 cent Tuesday to a record $3.607 a gallon Tuesday, according to a survey of stations by AAA and the Oil Price Information Service. Diesel prices rose 0.1 cent to a new record national average of $4.244 a gallon.

Many analysts expect gas prices to peak within the next month, and some say they could rise as high as $4 nationally. Many parts of the country, particularly in California and Hawaii, are already paying more than $4.

Gas prices have been following oil prices higher, but they have also responded to gasoline supply concerns. Platts' survey shows analysts predict the Energy Department report will show gasoline supplies fell last week.

Other energy futures followed oil lower Tuesday. In other Nymex trading, May gasoline futures fell 9.15 cents to settle at $2.9392 a gallon, and May heating oil futures fell 5.23 cents to settle at $3.2465 a gallon. June natural gas futures fell 48.7 cents to settle at $10.842 per 1,000 cubic feet.

In London, Brent crude futures fell $3.31 to settle at $113.43 a barrel on the ICE Futures exchange.

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Associated Press writers Pablo Gorondi in Budapest and Gillian Wong in Singapore contributed to this report.

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