Oil gave up over $2 to fall back below $130 a barrel

After further evidence of a weakening U.S. economy raised doubts over the outlook for crude demand in the world's biggest energy consumer, Oil prices drop back below $130/bbl.
At 4:05 p.m., New York-traded West Texas Intermediate crude for July delivery was down $2.37 at $129.82 a barrel. Last Thursday, prices hit an all-time high of $135.09 a barrel.

In London, Brent crude for July delivery was down $2.66 at $129.71 a barrel, having hit a record high of $135.14 last week.

'We've seen a steep sell-off since the release of weak U.S. housing data today and the opening in New York,' said Christopher Bellew at Bache Commodities. 'The fundamentals are not really backing these price levels.'

United States house prices dropped at the sharpest rate in two decades during the first quarter of 2008, according to a closely watched index on Tuesday, sparking further fears for the state of the world's largest economy.

Record oil prices have been garnering close attention since moving above $130 a barrel for the first time ever last week, with fears a slowing economy combined with rapidly rising inflation could prove disastrous for consumers.

Evidence that U.S. drivers have been curbing their consumption in response to rising costs at the pumps has stoked fears the crude market could be overbought, analysts said, despite ongoing concerns over global market tightness.

'Traffic was a little off this weekend, so some people will be wanting to see the demand figures for this week before making any more calls,' said Andy Lebow, senior vice president at MF Global in New York.

The long Memorial Day weekend in the U.S. is the traditional start of the peak demand summer driving season in America.

Weekly U.S. inventory figures -- out on Thursday this week due to the long weekend -- will be in focus as market participants try to gauge the impact of higher fuel prices on U.S. consumption.

A slight rebound in the U.S. dollar was also weighing on prices. A stronger dollar makes commodities priced in the greenback more expensive for holders of other currencies.

Oil prices had been up above $133 a barrel earlier in the session due to concerns over tight global diesel markets and Nigerian production outages caused by recent militant attacks.

Analysts said output cuts in Nigeria were in focus, as the lighter, low-sulphur 'sweet' crude from Africa's largest producer was better for refining into diesel and other products than heavier, high-sulphur 'sour' crude from countries such as Saudi Arabia and Iran.

Prices have risen by over 30 percent since the beginning of the year due to concerns over supplies, with long-term fears oil production growth is failing to keep pace with rising demand providing much of the justification for the move upwards.

With prices at double their level of a year ago, some investors have been encouraged to book-profits due to fears the market could be over bought, with billionaire investor Warren Buffet warning yesterday that a speculative bubble may have formed in the crude market.

However, few analysts are prepared to call a definite top to the market yet, with many seeing record prices as a classic response to the fundamentals of supply and demand rather than being driven by financial speculation.

source:www.forbes.com