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Tue 16 Nov 2010 05:13 PM

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Oil falls below $84 on US supply gain forecast

Crude down nearly five percent since last week's 25-month high, technicals show could drop to $83.62

Oil falls below $84 on US supply gain forecast
Oil and gas, oil field, GCC energy, GCC oil

Oil
fell more than $1 to below $84 on Tuesday, weighed down by a stronger dollar
and ahead of expected news of a rise in US crude stockpiles.

The
dollar touched a six-week high against the euro as investors cut exposure to
commodities and risk and as anticipation of the Federal Reserve's $600bn bond
programme pushed up U.S. Treasury yields.

Concerns
over the health of the Irish economy also weighed on the euro.

US
crude for December dropped by $1.26 per barrel to a low of $83.60 by 1125 GMT,
extending losses from the previous session. ICE Brent for January  fell $1.00 to $85.76.

Edward
Meir, senior commodity analyst at brokers MF Global in Connecticut, said he
expected markets to keep a wary eye on Ireland and on China, which has been
tightening monetary policy.

"Prices
[are likely to] remain slightly on the defensive as investors head for the
relative safety of the dollar while waiting for developments in Ireland and
China to unfold," Meir said.

The
drop in oil prices came most sharply at the front end of the futures market,
helping to steepen the contango in the forward curve. The December 2013 futures
contract for US crude had lost just 39 cents to $88.60 by 1125 GMT.

Analysts
expect crude stockpiles in the United States, the world's largest energy
consumer, to have edged up last week, following a surprisingly large drawdown
the week before.

Crude
stockpiles were seen rising by 400,000 barrels, while distillates were expected
to fall by 1.6 million barrels, a Reuters poll showed.

Industry
group the American Petroleum Institute (API) will issue its latest US crude oil
inventory data at 2130 GMT on Tuesday, followed by government data from the
Energy Information Administration (EIA) on Wednesday.

Crude
has fallen nearly five percent from a 25-month peak of $88.63 last week. The recent
sell-off was sparked by fears that China may raise interest rates to slow its
economy.

The
dollar has rebounded strongly over the last two weeks as the impact of the
Federal Reserve's quantitative easing has pushed up US bond yields.

A
stronger dollar can weigh on oil prices because it attracts investors away from
dollar-denominated crude by making oil more expensive for users of other
currencies.

With
bond yields not far from a three-month high near 2.97 percent hit on Monday, US
assets look attractive, analysts say.

The
10-year US Treasury yield soared 17 basis points on Monday for its biggest
one-day rise since June 2009, giving a broad lift to the dollar.