(Updates prices with settlements)
By Richard Valdmanis
HOUSTON, June 3 (Reuters) - Oil fell more than $3 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 move added to a steep sell-off since last month's peak
over $135 a barrel amid mounting worries that high prices may
dent global energy demand and that increased regulatory
scrutiny could cool speculation.
"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> settled down $3.45, or 2.7 percent, to
$124.74 a barrel after earlier hitting a low of $123.87. London
Brent crude <LCOc1> fell $3.44 to $124.58 a barrel.
Dealers said Federal Reserve Chairman Ben Bernanke's
comments 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 new rate cut.
Weakness in the greenback had been one factor 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 speculation that could just as easily
reverse. Influential hedge fund manager George Soros said
Tuesday that while the oil spike had some characteristics of a
bubble, prices were unlikely to crash soon.
"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
added, "a crash in oil markets is not imminent."
The U.S. Commodity Futures Trading Commission has unveiled
moves since last week to increase surveillance of the commodity
futures markets in a move that dealers said could trim the pace
of speculation.
Analysts have cited mounting evidence that demand for oil
was easing. They also noted that Asian countries, which have
led growth in fuel consumption, are starting to cut costly
subsidies that have sheltered consumers from high prices.
Indonesia, Sri Lanka and Taiwan already have 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 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. []
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 David Gregorio)
