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Oil Drops on Worries About Weaker Demand

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[March 24, 2008]  SINGAPORE (AP) -- Oil prices slipped nearly $1 a barrel Monday as traders worried that the flagging U.S. economy would cause oil demand to soften.

Oil's sharp decline started last week. Crude futures started plunging after the U.S. Federal Reserve-backed sale of Bear Stearns Cos. to JPMorgan Chase & Co. created fears of deeper economic problems. Prices dropped around 10 percent during the shortened trading week from a trading record of $111.80 hit last Monday.

"The collapse of Bear Stearns has caused investors to focus more on how a recession in the U.S. would cut oil demand," said Victor Shum, an energy analyst with Purvin & Gertz in Singapore. "Today we're seeing some pullback and some profit taking too."

Light, sweet crude for May delivery dropped 84 cents to $101 a barrel in Asian electronic trading on the New York Mercantile Exchange by midafternoon in Singapore.

The contract on Thursday fell 70 cents to settle at $101.84 a barrel. The market was closed for Good Friday.

Shum said oil's price swoon may not last for long.

"The U.S. economic troubles on the one hand would undermine oil prices ... but so long as the U.S. dollar remains weak, there will be support for oil prices as commodities like oil and gold as these are seen as a hedge against the falling dollar," Shum said.

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"It's a tug of war, and oil pricing has not yet collapsed, it has simply pulled back," he said.

Most investors expect the Federal Reserve to cut interest rates several more times this year, moves that are sure to put new pressure on the dollar. Lower interest rates tend to weaken the greenback, driving investors to commodities such as oil that they view as a hedge against inflation. A lower dollar also makes oil less expensive to overseas investors -- a trend that reverses when the dollar strengthens.

Prices were pressured when the Labor Department said Thursday the number of people filing for unemployment benefits jumped by 22,000 last week, much more than expected. A sharp slowdown in the economy could reduce demand for oil and gasoline.

On Wednesday, the Energy Department said gasoline demand dropped by 1 percent last week.

In other Nymex trading, heating oil futures lost 1.22 cents to $2.965 a gallon while gasoline prices fell 0.51 cent to $2.60 a gallon. Natural gas futures dropped 1.4 cents to $9.051 per 1,000 cubic feet.

In London, Brent crude futures fell 76 cents to $99.62 a barrel on the ICE Futures exchange.

[Associated Press; By GILLIAN WONG]

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

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