LONDON, (Reuters) – Oil fell back on Thursday from all-time highs reached the previous session when a surge of investor cash into commodities outweighed concerns over a slowdown in top oil consumer the United States.
The basic supply/demand outlook for oil has not changed, but signs of rising inflation are attracting fund flows into commodities, traditionally used as inflation hedges.
Oil has averaged $93.02 a barrel this year, up nearly a third on the average in 2007 of $72.30.
U.S. crude for April delivery was down 88 cents at $98.82 a barrel by 1349 GMT.
The March contract, which expired on Wednesday, hit a record of $101.32, before closing at $100.74 a barrel.
Oil’s latest spurt has taken it close to its all-time inflation-adjusted high of $102.53 hit in April 1980, a year after the Iranian revolution.
London Brent was down 84 cents at $97.58 a barrel. “We still do not see much in terms of news that justifies the blistering rally we have had over the past few days,” said Edward Meir, analyst at broker MF Global. “But neither would we advocate going short here, as the current run could continue for a little while longer given the general infatuation with commodities.”
Funds are piling into oil and commodities to protect their returns against inflation and because of the weak dollar. Gold, copper and soybeans, for example, have all touched record highs.
Oil is also sensitive to political developments that could impact supply. Turkey, which has massed tens of thousands of troops along its frontier with Iraq, shelled several Kurdish rebel positions inside northern Iraq on Thursday.
Economic data on the United States have painted a gloomy picture for oil demand in the world’s top energy consumer, but investors’ focus has shifted for now to the inflation outlook.
The U.S. Consumer Price Index, for example, rose faster than expected in January and for the second straight month.
The U.S. central bank has lowered its 2008 economic growth forecast, raising expectations it will cut interest rates again to revive the economy. “That’s another reason why oil’s been so strong. Markets have been pricing in another interest rate cut. This will weaken the dollar and is bullish for U.S.-dollar denominated commodities,” said Jim Ritterbusch of Ritterbusch & Associates.
U.S. oil inventory data due at 1530 GMT are likely to show crude oil stocks rose by 2.3 million barrels last week, the sixth build in a row, according to a Reuters poll.
Gasoline stocks are expected to have risen by 1.1 million barrels, while distillates are set to have fallen by 1.7 million barrels after a spell of cold weather. The oil inventory report has been delayed a day due to Monday’s Presidents’ Day holiday.
Analysts have pointed to rising U.S. crude oil stocks as evidence that market’s supply/demand balance is not constrained.
Members of the Organization of the Petroleum Exporting Countries have repeatedly said there is no need for more oil. “We will not just react to $100 oil,” Qatar Oil Minister Abdullah al-Attiyah told Reuters. Qatar sees demand for oil falling seasonally in the second quarter as the winter ends and customers are requesting less oil in March, not more, he said. But the International Energy Agency, which advises industrialised countries on energy matters, has urged OPEC to, at the very least, keep oil production levels unchanged, to rebuild low crude stocks.
OPEC will review production levels when it meets next month.