Oil drifts lower as traders reassess outlook

[March 20, 2009]  VIENNA (AP) -- Oil prices drifted lower Friday after surging above $51 a barrel, as traders reevaluated expectations for renewed crude demand amid persistent uncertainty about the global economy.

Oil prices have jumped from below $35 a barrel last month amid a global stock market rally and easing concerns about the international financial sector.

But oil inventories continue to rise, and there's been scant solid evidence that the fall in crude demand has bottomed out. The outlook for the global economy also remains cloudy, analysts say.

Benchmark crude for April delivery fell 87 cents to $50.74 a barrel by noon on the New York Mercantile Exchange. Prices climbed $3.47 on Thursday to settle at $51.61.

With the April contract set to expire Friday, most of the trading had shifted to the contract for May, which was down 37 cents to $51.67.

"One significant bad figure and the whole thing can collapse, so it's really fragile," said Christoffer Moltke-Leth, head of sales trading for Saxo Capital Markets in Singapore.

Oil has been bolstered this week by news the U.S. Federal Reserve plans to buy $1.25 trillion of government bonds and mortgage-backed securities. The announcement sent the dollar down on worries the plan would expand dramatically the money supply and stoke inflation. Oil contracts are often used by investors as a hedge against inflation and a weakening dollar.

"Oil is still strongly correlated to the dollar," Moltke-Leth. "What the Fed is doing -- printing money to buy government debt -- it's just the most inflationary thing you can do."

The dollar was steady at 94.58 yen Friday, but that was down from nearly 99 yen just two days ago. The euro was trading at $1.3649.

OPEC has also helped boost prices by largely complying with 4.2 million barrels a day of production cuts the group has announced since September. The Organization of the Petroleum Exporting Countries decided not to reduce output quotas at a meeting on Sunday, but instead focus on adhering to the existing cuts.

Analysts estimate OPEC has so far fulfilled about 80 percent of the promised cuts.

"They won a bit of credibility by saying they have to stick to their quotas and be disciplined," Moltke-Leth said.

Vienna's JBC Energy forecast future upward pressure, despite Friday's downward move.

"OPEC cuts, declining volumes in floating storage, refiners preparing for the summer driving season as well as ... mentioned inflationary concerns should all contribute to this development," it said in its daily report.

In other Nymex trading, gasoline for April delivery fell slipped by close to 2 cents to $1.42 a gallon, while heating oil fell by more than a penny to $1.34 a gallon. Natural gas for April delivery was steady, up more than 3 cents to $4.21 per 1,000 cubic feet.

In London, Brent prices fell 71 cents to $49.96 on the ICE Futures exchange.

[Associated Press; By GEORGE JAHN]

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

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