(Updates prices)
By Alastair Sharp
LONDON, June 3 (Reuters) - Oil dropped by more than a dollar
to below $127 a barrel on Tuesday, as traders weighed the threat
to sustained demand from changes in fuel subsidies in Asia.
U.S. light crude for July delivery <CLc1> fell $1.21 a
barrel to $126.55 by 1215 GMT. Prices fell initially on Monday
too, but ended the day higher in a refined products-led recovery
from session lows.
London Brent crude <LCOc1> fell $1.25 to $126.77 a barrel.
Analysts said there were growing concerns about oil demand
holding up, given the mounting pressure on high-growth Asian
economies to slash subsidies.
"The demand side of the equation is being priced in," said
Olivier Jakob at Petromatrix.
Indonesia, Sri Lanka and Taiwan have already announced cuts
to subsidies, while Malaysia said it would scrap fuel price
controls in August in a move that could double pump prices.
India is also expected to raise fuel prices on Wednesday.
"The high oil price will clearly be more keenly felt by the
end-consumer without these subsidies," said Tom Nelson, an
analyst for the Guinness Global Energy Fund, which takes
long-only positions in oil and gas firms.
"It's difficult to ascertain the demand destruction this
could lead to," he said.
The head of the International Energy Agency (IEA) told
Reuters on Monday that world oil demand was shrinking more
quickly than first thought and the IEA may cut its demand growth
forecasts further. []
Most of that decline in demand has so far been in developed
economies as sharp price rises bite for consumers and industry.
"Demand figures are falling fast in Europe. We're seeing
things cooling down," one broker said. "There are some big
numbers being taken out of the market."
STORM SEASON APPROACHES
The decline came despite U.S. dollar weakness and further
credit jitters following a report that investment bank Lehman
Brothers may raise up to $4 billion of capital and the
downgrading of Standard & Poor's credit ratings for three
investment banks. []
More direction will emerge with the release of U.S. weekly
stocks data on Wednesday, with a preliminary poll showing
analysts expect U.S. crude oil inventories to have risen by 1.1
million barrels last week, gasoline stocks up by 600,000 barrels
and distillates up 1.4 million barrels. []
The first storm of the Atlantic hurricane season, Tropical
Storm Arthur, forced Mexico to shut two of its three main crude
oil ports because of rough seas over the weekend.[]
Even though it quickly weakened into a tropical depression,
Arthur was a reminder of the start of this year's hurricane
season, which forecasters predict will be more active than
usual.
"You cannot disregard the hurricane season. But it is a
difficult call, pitching U.S. demand versus the potential
hurricane threat and other supply worries," said Mark Pervan,
senior commodities analyst with ANZ in Australia.
(Additional reporting by Santosh Menon; editing by James
Jukwey)
