oil prices fall to 111 a barrel

August 15, 2008
Oil prices fall to $111 a barrel

Oil prices reached their lowest point in more than three months

OPEC forecast of lower demand also put downward pressure on prices

NEW YORK. Oil prices fell to the $111 level Friday, reaching their lowest point in more than three months after the dollar muscled higher and OPEC predicted world demand for energy will keep falling.


Oil prices dropped lower on speculation that demand will fall further in the coming months.

Light, sweet crude for September delivery fell $3.26 to $111.75 a barrel on the New York Mercantile Exchange, after earlier falling to $111.34, its lowest since May 2 and more than $35 -- or 24 percent -- below oil's July 11 trading record above $147.

As high energy costs force countries around the globe to cut back on consumption, crude prices have plummeted and are now within striking distance of $100 a barrel, a level first reached Feb. 19.

At the pump, retail gas prices also continued to fall, with a gallon of regular shedding about half a penny overnight to a new national average of $3.771, according to auto club AAA, the Oil Price Information Service and Wright Express. Gas peaked at $4.114 on July 17.

Crude fell after the dollar gained strength against the euro on U.S. data showing that industrial output rose more than expected in July. The 15-nation euro has lost some of its luster compared to its American rival amid growing evidence that European economies are slowing. The euro bought $1.4672 in trading Friday, down from $1.4811 late Thursday.

A rising dollar typically pushes oil prices lower as investors who buy crude and other commodities as hedges against inflation start dumping their positions to cut their losses. A stronger greenback also makes dollar-denominated commodities more expensive to overseas buyers, further eroding demand.

"The dollar is on fire again so that's causing people to re-evaluate everything," said Phil Flynn, oil analyst at Alaron Trading Corp. in Chicago. "It means oil prices could fall dramatically. We could see prices get to double digits if this continues."

An OPEC forecast of lower demand also put downward pressure on prices.

Europe's biggest economies stop growing
In its monthly oil report, the organization forecast world appetite for oil this year overall will fall by 30,000 barrels a day. While forecasting demand growing by a daily 1 million barrels a day this year, and another 900,000 barrels in 2009, the report noted that world demand growth next year will also be "the lowest since 2002," with demand growth from the major industrialized countries actually declining.

"They're basically saying we could have an oil glut because demand is slowing," Flynn said. "It's obvious that high prices do slow down demand and the market works."

The OPEC report came two days after the U.S. Department of Energy highlighted the ongoing drop in U.S. demand for energy as Americans struggle with high costs for gasoline, food and other goods.

Oil's steady decline has continued despite the simmering weeklong conflict between Russia and Georgia over two breakaway provinces. Western leaders worked Friday to persuade Russia to pull troops out of Georgia, but regional tensions soared after a top Russian general warned that Poland could face attack over its missile defense deal with the United States.

British oil company BP said Thursday it has resumed pumping gas into the Baku-Tbilisi-Erzurum pipeline that runs through Georgia, but two oil pipelines remained closed. BP's Baku-Supsa oil pipeline was shut as a precaution, and the larger Baku-Tbilisi-Ceyhan line, a key supplier to Western countries, remains shut after a fire earlier this month on the Turkish section of the line.

Only weeks ago, the conflict in Georgia would likely have sent oil prices soaring. But the market has largely ignored the fighting because traders have already priced in the geopolitical risk, analysts say. Crude's monthlong nosedive has also made it harder for bullish traders to spark a rally, despite a possible threat to oil installations.

Also weighing on prices Friday was the expiration of September oil contract options at the end of the day, a trading cycle that often increases volatility.

In other Nymex trading, heating oil futures fell about 5 cents to $3.0494 a gallon, while gasoline prices slipped more than 8 cents $2.8265 a gallon. Natural gas futures were down about a penny at $8.128 per 1,000 cubic feet.

In London, September Brent crude fell $2.81 to $110.87 a barrel