Oil extends decline towards $89 as dollar strengthens

Oil extends decline towards $89 as dollar strengthens


Singapore: Oil fell for a second day on Wednesday, extending the previous session’s 2.4% drop, as investor enthusiasm for commodities diminished with a stronger dollar, following a sharp year-end rally in raw material prices.

US crude for February shed 20 cents to $89.18 a barrel at 10:02am after reaching a 27-month high of $92.58 on Monday.

Tuesday’s drop was the biggest single-day percentage loss since 16 November, when prices closed almost 3% lower.

“Ninety dollars a barrel already has a very strong economic picture built into the price," said Tony Nunan, a risk manager with Tokyo-based Mitsubishi Corp.

“Maybe people think the price is starting to get too high, and if the dollar is stronger, we should have lower commodity prices."

ICE Brent for February fell 19 cents to $93.34, while the dollar strengthened almost 0.2% against a basket of currencies .

Investors said abrupt selling across energy, metal and agricultural markets reflected a correction to the rally that capped 2010, rather than a sudden reversal of the optimism that made commodities the top asset class last year.

Gains in U.S. fuel stockpiles outpaced a drop in the nation’s crude inventories during the last week of 2010, industry group the American Petroleum Institute reported on Tuesday.

Crude inventories plunged 7.5 million barrels in the week through 31 December, much greater than analyst expectations of a 1.8-million-barrel drawdown in a Reuters poll.

But gasoline stocks rose 5.6 million barrels, far outstripping analyst expectations of a 300,000-barrel increase, while distillate stocks rose 2.2 million barrels, compared with forecasts for a 400,000-barrel rise.

Government statistics from the US Energy Information Administration will follow on Wednesday at 9:00pm.

Traders have noted that there was an expectation that oil inventories will rebound in the new year and provide pressure on prices after companies drew down stored supplies for tax reasons at the tail end of 2010.

“Inventories have come down substantially from the peak, but they are still relatively high for the commercial US total," Mitsubishi’s Nunan said. “That is why $90 might be a bit of a stretch, and we still have fairly decent Opec spare capacity."

Commodities fell sharply on Tuesday as investors took profit on the heady gains made on thin holiday volume over the past three weeks.

The Reuters-Jefferies CRB index dropped nearly 2% in its sharpest one-day fall since mid-November after investors and traders worldwide returned to work to find many markets had run up to their highest in two years or more.

In other financial markets, Wall Street also pulled back after a strong December boosted equities to two-year highs, with consumer and energy stocks weaker.

The dollar held firm on Wednesday, supported by further evidence that the US economic recovery is becoming self-sustained, while the correction in commodity prices pressured the Australian dollar.