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Oil Prices Tumble More Than 3 Percent

Posted on: Monday, 15 May 2006, 15:07 CDT

By BRAD FOSS

WASHINGTON - Crude-oil futures declined more than 3 percent Monday, falling below $70 a barrel amid concerns about weakening demand and rising inflation.

Meantime, a Bush administration official said late in the trading day that the U.S. would ban arms sales to Venezuela, a major oil supplier, because of its insufficient counterterrorism efforts. It was not immediately clear what impact the move would have on oil markets, though one analyst said if Venezuela retaliated by refusing to sell crude to the United States, it could push prices higher.

Light, sweet crude for June delivery fell $2.39 to $69.65 a barrel on the New York Mercantile Exchange. That followed a drop of $1.42 on Friday.

Nymex gasoline futures fell more than 10 cents to $2.075 a gallon, while natural gas futures fell 15 cents to $6.13 per 1,000 cubic feet.

June Brent crude futures on London's ICE Futures exchange fell $1.97 to $70.35 a barrel.

Michael Guido, Societe Generale's director of commodity strategy, chalked up the selloff to technical trading.

"This is demand destruction not on a consumer level. It's demand destruction on a trading level," he said.

"The reality of it is that the market was in desperate need of a correction," Guido said. "There was not a big change in the world economy."

Still, the International Energy Agency said last week that high prices have pushed oil demand downward, and the Federal Reserve raised concerns about inflation, suggesting interest rates might be pushed higher in order to slow growth.

Saudi Arabia said Monday that the market is well supplied, in part because high prices have trimmed consumption levels.

"There is no lack of capacity right now," Saudi oil minister Ali Naimi told reporters on the sidelines of an energy conference in Amman, Jordan. Asked about the impact of high prices, Naimi said: "In general, when prices are high, people check their pockets and when they are lower, they open them."

But James Cordier, president of Liberty Trading in Tampa, Fla., said the selloff could be short-lived.

"Hurricane season is right around the corner," Cordier said. Last year's hurricanes Katrina and Rita devasted oil and natural gas production in the Gulf of Mexico, and forced the shutdown of refineries and pipelines that deliver fuel to the East Coast and Midwest markets.

A State Department official speaking on condition of anonymity said the arms sale ban came about because Venezuela has been providing a safe haven for the two main leftist guerrilla groups in Colombia. The official spoke only on the condition of anonymity because the arms sale ban had not yet been announced.

Antoine Halff, an analyst at Fimat USA in New York, said it was too soon to determine how the oil market would react, though he anticipated some short-term nervousness until more details were available. "The knee-jerk reaction will be bullish," said Halff, though he added that the U.S. has ample supplies right now and that any potential retaliatory action by Venezuela would be tempered by the fact that global demand appears to be weakening.

The Paris-based IEA said in its monthly oil market report Friday that high prices and mild temperatures curbed U.S. oil demand in the first quarter. The agency also noted strong exports from former Soviet countries and concluded that this implied weakening demand.

Specifically, the energy watchdog cut 220,000 barrels a day off its demand growth forecast for the year, trimming it to 1.25 million barrels a day and thus putting average daily demand at 84.84 million barrels.

Markets also were relieved by the release on Friday of three foreign oil workers kidnapped by gunmen in Nigeria, where militant attacks on oil installations have cut more than 20 percent of Nigeria's daily production of 2.5 million barrels. Vienna's PVM Oil Associates put the shortfall at 550,000 barrels a day.

But concerns about Iran, a major oil exporter, left limited room for prices to fall.

The U.N. atomic agency has found traces of highly enriched uranium at an Iranian site linked to the country's defense ministry, diplomats said Friday. The finding added to concerns that Tehran was hiding activities related to making nuclear arms.

European Union foreign ministers were to meet Monday in Brussels, Belgium, to consider sweetening a package of incentives that would entice Iran to suspend uranium enrichment - an issue that has now reached the U.N. Security Council but was put on hold to give the EU more time for diplomacy.

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Associated Press reporters George Gedda in Washington, George Jahn in Vienna, Austria and Gillian Wong in Singapore contributed to this report.

Source: Associated Press/AP Online

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