Oil extends decline after big drop a day earlier

[July 16, 2008]  VIENNA, Austria (AP) -- Oil prices extended their decline Wednesday after diving more than $6 a barrel in the previous session on concerns that U.S. economic problems may reduce demand for crude.

By midday in Europe, light, sweet crude for August delivery was down S1.56 at $137.18 a barrel in electronic trading on the New York Mercantile Exchange.

That came a day after crude plunged $6.44, or 4.4 percent, to settle at $138.74 a barrel in an extremely volatile session. Over the course of Tuesday's session, the contract rose as high as $146.73 and fell as low as $135.92.

Prices hit a trading record of $147.27 on Friday.

Concern that quickening inflation and slowing economic growth will cut consumer demand in the U.S. for gasoline and other oil products may slow a bullish trend that's seen crude prices roughly double in the past year, said Tetsu Emori, a commodity markets fund manager at ASTMAX Futures Co. in Tokyo.

"The market is eyeing the weaker economy and the weaker demand out of the U.S.," Emori said. "The price uptrend is still ongoing, but without a news catalyst, there isn't as much confidence that we'll break US$150 in the short-term."

Federal Reserve Chairman Ben Bernanke told Congress on Tuesday that "numerous difficulties" are racking the U.S. economy, and warned that rising prices for energy and food are elevating the risks of inflation.

At the same time, the Labor Department reported that wholesale inflation jumped by 1.8 percent last month, a larger-than-expected gain. Over the past year, wholesale prices have risen 9.2 percent, the most since 1981.

The latest monthly market report from the Organization of Petroleum Exporting Countries gave traders further reason to unload oil this week.

The cartel predicted world oil demand will rise by 900,000 barrels a day in 2009, or 100,000 barrels per day less than this year. OPEC blamed the slowdown in growth on slumping economies and high pump prices in rich, industrialized countries.

Vienna's JBC Energy cited MasterCard Advisors as noting that the four-week average of U.S. gasoline demand was down 3.5 percent from the same period a year earlier.

"Following the fourth of July holidays gasoline demand normally goes up but last week demand was down by 5 percent compared to a year earlier," JBC wrote.

Amid the signs of demand destruction, though, potential supply threats and a weak U.S. dollar continue to put a floor to prices.

A strike by offshore oil workers in Brazil could be settled before its scheduled end on Friday, but other workers for state-run company Petrobras plan to stage a separate two-day nationwide strike starting Thursday to demand greater participation in the company's profits.

Hours after presidential aide Luiz Dulci said Petroleo Brasileiro SA could reach agreement with the striking offshore workers in the next few days, a union representing the second group of workers said they would walk off their jobs.

Petrobras produces about 1.6 million barrels of oil a day. It is estimated to be the world's sixth largest oil company in terms of market capitalization.

The euro traded under $1.60 on Wednesday but remained within sight of its all-time high of $1.6038 reached the previous day.

Many investors view oil and other commodities as hedges against inflation and a weakening dollar, and their prices tend to rise as the currency declines.

August Brent crude fell $1.91 to $136.84 a barrel by midday Wednesday on the ICE Futures exchange in London.

In other Nymex trade, heating oil futures shed more than a penny to $3.9060 a gallon while gasoline prices lost over 3 cents to sell for $3.34990 a gallon. Natural gas futures slipped more than 6 cents to $11.414 per 1,000 cubic feet.

[Associated Press; By GEORGE JAHN]

Associated Press writer Alex Kennedy contributed to this report from Singapore.

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