(Updates prices, details)
By Richard Valdmanis
HOUSTON, June 3 (Reuters) - Oil fell more than $2 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.
The moved added to a steep sell-off since last month's
all-time peak over $135 a barrel that has been propelled by
intensifying worries that high prices were denting the outlook
for global energy demand.
"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 $2.46 to $125.30 a barrel by 1730 GMT
after earlier hitting a session low of $124.80. London Brent
crude <LCOc1> fell $2.50 to $125.52 a barrel.
Dealers said the comments by Federal Reserve Chairman Ben
Bernanke warning that a weak dollar could worsen inflation
pushed the market lower by feeding a recovery in the U.S.
currency and dimming the prospects of a deeper rate cut.
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.
"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.
CORRECTION OR MELTDOWN?
Some analysts say oil's doubling since last year has been
propelled by a surge in speculative funds. 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.
But he said a steep sell-off is not likely soon.
"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.
"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.
More evidence on the state of supply and demand will emerge
with the release of U.S. weekly stocks data on Wednesday.
A Reuters poll showed analysts expected U.S. crude oil
inventories would have risen by 800,000 barrels last week,
gasoline stocks up by 400,000 barrels and distillates up 1.4
million barrels. []
(Additional reporting by Alastair Sharp and Santosh Menon in
London; Editing by Marguerita Choy)
