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Oil drops below $118 a barrel with supply concern easing

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[April 29, 2008]  LOS ANGELES (AP) -- Oil prices fell Tuesday amid expectations that a supply disruption in Britain would soon be resolved and as the U.S. dollar strengthened against the euro.

Light, sweet crude for June delivery fell 79 cents to $117.96 a barrel in electronic trading on the New York Mercantile Exchange by midday in Europe. The contract settled up 23 cents at $118.75 a barrel on Monday.

In London, Brent crude futures fell 96 cents to $115.78 a barrel on the ICE Futures exchange.

Nymex crude futures the previous day rose to a record $119.93 a barrel as labor actions in Nigeria and Scotland threatened crude supplies. But a pipeline that normally carries 700,000 barrels of crude a day to the U.K. is likely to be back in operation soon.

"The Forties pipeline shutdown in the North Sea is fully priced in and the market may be taking some mild profits on the basis that we'll see a return (of operation) ... in the near term," said Mark Pervan, a senior commodity strategist at the ANZ Bank in Melbourne.

The Forties Pipeline System was shut down by BP PLC because of a 48-hour walkout by employees at a refinery in central Scotland. The refinery powers the onshore processing plant for North Sea crude coming through the network, and once the strike is over later Tuesday, the pipeline system should resume operation within a few days.

Oil prices also retreated from Monday's record as the dollar gained strength against the euro.

At midday in Europe, the euro stood at $1.5568, down from the $1.5645 that it purchased late Monday in New York. The British pound was down to $1.9738 from $1.9900 in New York.

The euro rose to a new all-time high of $1.6018 last week on continued concern about the U.S. economy.

"We're seeing a little bit of ... selling on the back of a firmer U.S. dollar and concerns that the dollar will maybe rebound mildly in the short term," Pervan said.

Energy investors will be closely watching the Federal Reserve's decision Wednesday on interest rates; lower rates tend to weaken the dollar. If, as expected, the Fed lowers a key interest rate by another quarter percentage point and signals that it will temporarily hold off on any future rate cuts, the dollar could strengthen, and oil might fall.

Pervan said the oil market has already priced in the expectation that the Fed will lower the interest rate by 25 basis points.

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"There could be growing expectations that it could be the final cut for a while and that we'll see some upward momentum of the dollar," Pervan said.

Analysts also noted that the inability of the Nymex contract to breach the $120 mark was a possible sign that prices may have topped out for now.

"WTI needs to break $120 a barrel to maintain momentum but the resistance has been strong," said Olivier Jakob of Petromatrix in Switzerland.

Meanwhile, other supply concerns continue to support prices.

In Nigeria, workers at an Exxon Mobil Corp. joint venture cut production by an unspecified amount to demand more pay. The company notified clients it may not be able to meet its contractual obligations to supply oil, but said some production was not affected. Militant attacks on oil infrastructure have also cut production of Nigeria's light, sweet crude, which is easily refined. After years of attacks, Nigeria's output is dropping and the country can produce only about 75 percent of its official capacity of 2.5 million barrels per day.

"Nigeria's always a factor in oil prices, it's always had an ongoing issue with oil outages, but we're seeing a bit of an increased activity in militant attacks," Pervan said. "They'll keep a high floor on the price."

Also, union officials at the Grangemouth refinery in Scotland have said further industrial actions are possible if owner Ineos Group Ltd. doesn't back down in the dispute over pensions.

Mark Killick, spokesman for Ineos, also said restoring operations to the refinery could take as long as a month if there were problems reintroducing heat and pressure into the pipes.

In other Nymex trading, heating oil futures fell 0.57 cent to $3.2931 a gallon while gasoline prices lost 3 cents to $3.007 a gallon. Natural gas futures fell 19.9 cents to $11.130 per 1,000 cubic feet.

[Associated Press; By PABLO GORONDI]

Associated Press writer Gillian Wong in Singapore contributed to this report.

Copyright 2008 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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