(Updates prices, details)
By Alastair Sharp
LONDON, June 3 (Reuters) - Oil fell $2 a barrel to below
$126 a barrel on Tuesday after the U.S. Federal Reserve issued
a rare warning on the inflationary risk posed by a weak dollar,
suggesting the central bank is not likely to cut interest rates
further this year.
"In short, the commodity complex's 'all clear to buy' signal
has just been flicked off and I am sure traders are on high
alert for a rebound in the dollar, a bearish event for
commodities," said Chris Jarvis, senior analyst at Caprock Risk
Management in New Hampshire.
U.S. crude <CLc1> fell $1.84 to $125.92 a barrel by 1600
GMT after earlier hitting a session low of $125.20. London
Brent crude <LCOc1> fell $1.72 to $126.30 a barrel.
Oil prices are down nearly $10 from their peak above $135 a
barrel hit last month, pushed lower by concerns over weakening
global demand and a recovery in the dollar from record lows.
Weakness in the greenback had been one of the factors
driving investment in energy, agriculture and metals by
encouraging the buying of dollar-denominated commodities as a
hedge against inflation.
"(U.S. Federal Reserve Chairman Ben) Bernanke seems more
concerned about inflation than growth and for the first time
that I remember he brings the weak dollar into the macro picture
by linking rising import costs -- inflationary -- to the front
page," said Tom Sowanick of Clearbrook Financial.
Some analysts say oil's rapid rise of about 30 percent
since the start of the year had a speculative element. That was
the view of influential hedge fund manager George Soros.
"We are currently experiencing the bursting of a housing
bubble and, at the same time, a rise in oil and other
commodities which has some of the earmarks of a bubble," Soros
said in prepared testimony before the U.S. Senate.
"To be sure, a crash in oil markets is not imminent."
Analysts said there was mounting evidence demand for oil
was easing and expectations that Asian economies, which have
led growth in fuel consumption, will slash subsidies because
they have become too costly.
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 was 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 might 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."
More evidence on the state of supply and demand will emerge
with the release of U.S. weekly stocks data on Wednesday.
A preliminary poll showed analysts expected U.S. crude oil
inventories would have risen by 1.1 million barrels last week,
gasoline stocks up by 600,000 barrels and distillates up 1.4
million barrels. []
(Additional reporting by Richard Valdmanis in New York, Santosh
Menon; editing by Matthew Lewis)
