Oil drops to $123 a barrel

Losses add to more than $3 slide since US Fed warned weakness of dollar threatened to stoke inflation.
Oil drops to $123 a barrel
By Ikuko Kao
Wed 04 Jun 2008 09:11 AM

Oil on Wednesday fell below $124 a barrel to its lowest level in nearly three weeks after a fuel price rise in India, which is expected to curb demand.

Wednesday's losses added to a more than $3 slide on Tuesday when the US Federal Reserve warned the weakness of the US currency threatened to stoke inflation.

US crude fell to as low as $123.15 a barrel, the lowest since mid-May. It was trading 85 cents lower at $123.46 a barrel by 0939 GMT. London's Brent crude was trading $1.26 lower at $123.32.

Dollar weakness, which makes dollar-denominated commodities relatively cheap, had been a major factor in oil's rise to a record above $135 a barrel in May.

The high prices have begun to erode demand and have made the cost of subsidies paid out by governments in emerging economies very hard to bear.

India raised its petrol and diesel prices by about 10% on Wednesday, the biggest increase in years.

Other Asian countries have already cut or are considering reducing subsidies, with potentially major implications for demand.

If demand in Indonesia, Taiwan, Thailand, Malaysia and India fell by 5%, that would lower daily crude use by more than 310,000 barrels, the equivalent of two North Sea oil fields' output, said Addison Armstrong of Tradition Energy.

Wednesday's sharp sell-off followed strong selling on Tuesday when US Federal Reserve Chairman Ben Bernanke's warning sent the dollar higher and pushed oil and other commodities lower.

"This could signal the end of the surge in dollar-based commodities which have attracted buyers who see it as a hedge against inflation," Robert Laughlin with MF Global said in a research note.

The oil markets could take further direction from the latest US data on supply and demand scheduled for release at 1430 GMT on Wednesday.

Analysts polled by newswire Reuters expected an 800,000-barrel rise in US crude stocks, a 1.4 million barrels increase in distillates and a 400,000-barrel rise in gasoline inventories. (Reuters)

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