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OIL FUTURES: Crude Sinks To Two-Month Low On Stronger Dollar December 11, 2009

Posted by mytruthaboutoil in Oil (general), Oil prices.
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Crude futures dropped to a two-month low Friday as the dollar–but not oil demand–received a boost from the quickening pace of the U.S. economic recovery.

Light, sweet crude for January delivery settled 67 cents, or 1%, lower at $69.87 a barrel on the New York Mercantile Exchange. Futures have now dropped for eight consecutive sessions, shedding 11% of their value.

January Brent crude on the ICE futures exchange settled 2 cents higher at $71.88 a barrel.

Between Friday’s stronger-than-expected pickup in U.S. retail sales and last week’s surprise drop in the unemployment rate, the economic recovery is starting to put downward pressure on oil prices.

Earlier this year, signs that the world’s biggest oil consumer was pulling out of recession raised hopes that demand would rise. Instead, demand has stagnated in the U.S. and supplies of fuel are rising globally, although crude stockpiles may have begun to decline.

Meanwhile, investors have begun buying the dollar, anticipating that a quicker rebound in the economy could lead the Federal Reserve to raise interest rates. That’s left oil futures with little support for a push toward the upside, and a rapidly strengthening dollar pulling down.

After the U.S. Commerce Department reported a 1.3% increase in November retail sales Friday, double economists’ consensus forecast, the dollar strengthened to $1.4586 against the euro from $1.4777 earlier in the day. The dollar has swung to a two-month high less than two weeks after nearly dropping to a 16-month low, a move set off by the unexpected drop in the U.S. unemployment rate to 10% a week ago.

As the U.S. currency rises in value, dollar-denominated commodities like oil become more expensive–too costly, when demand is weak and supplies are growing.

“This market’s been overpriced for quite some time,” said Darin Newsom, senior analyst at DTN, a market-information service in Omaha, Neb. “Commodities as a whole look like they could start to come down, with crude oil one of the key” leaders.

Newsom said oil could be dragged down another $10 a barrel before low prices begin to spur enough demand for a rebound.

Oil demand is expected to rise by 1.5 million barrels a day next year, the International Energy Agency said Friday, slightly more than this year’s forecasted decline. Combined global oil and fuel inventories are starting to drop, but could still cover 59.4 days of demand, 2.5 days higher than a year ago, the IEA said in its monthly market report.

“Even if demand improves a bit, there’s a lot of supply that has to be worked out,” said Phil Flynn, an analyst with PFGBest in Chicago.

Front-month January reformulated gasoline blendstock, or RBOB, settled 65 cents, or 0.4%, higher at $1.8416 a gallon. January heating oil settled 56 points, or 0.3%, higher at $1.9085 a gallon.

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