Oil gives up around a dollar on profit-taking, US recession fears

Oil fell by around a dollar as end of week profit-taking and concerns over the health of crude's recent rally knocked the top off yesterday's record price.

At 4.00 pm, New York's WTI crude for April delivery was down 87 cents at 109.46 usd per barrel, having yesterday traded to a new all-time high of 111.00 usd.

In London, Brent crude for April delivery was down 84 cents at 106.70 usd per barrel, having yesterday touched 107.88 usd, its highest ever price.

Crude prices have spiked to a series of record highs in recent sessions, as investors poured into oil in a bid to guard against historic dollar weakness. But with the US economy possibly already in recession, and economic fears heightened today by news Bear Stearns has had to seek emergency funding, crude's recent gains appear to be detached from market fundamentals.

A US recession should see demand growth slow, while rising crude inventories point to decent supplies heading into the second quarter, when crude usage is generally at its lowest.

"Oil prices are treading in dangerous territory as oil and gasoline are being played more as a hedge against the dollar and has little regard for supply and demand," said Alaron trader Phil Flynn in Chicago.

But while prices have eased today, few investors are confident of calling a top on the market, despite an unsupportive fundamental backdrop. The dollar has tanked to another record low against the euro, possibly encouraging more hedging activity in crude next week, while also making prices cheaper for overseas investors.

MF Global analyst Ed Meir said: "With the sinking dollar providing support, the path of least resistance seems to be higher still," though he warned that markets could be dangerously overbought, with the risk of a sharp decline in prices not to be ruled out.

OPEC, the producer's cartel responsible for some 40 pct of global oil supplies, today revised its monthly estimation for US economic growth down, but kept its oil demand figures largely unchanged at 87 mln bpd for 2008.

Last week, the group decided to hold production quotas steady, despite pressure from the US to increase output to help cool record prices.

While OPEC is not due to meet again until September, the cartel said it would, "continue to closely monitor ongoing market developments and as always stand ready to take the necessary measures in line with their commitment to market stability and ensuring adequate supplies."

OPEC has consistently blamed recent price gains on market speculation, geopolitical tensions, and the weakening dollar, rather than a lack of supplies in the market.

Some have explained the recent record highs seen in oil and other commodity markets, set against the backdrop of an economic slowdown, as indicative of a broader trend.

Goldman Sachs analysts have argued that booming demand from developing nations, increased resource nationalism, and decades of underinvestment in commodities has created an environment where prices can continue to rise despite a slowing economy.

"The most recent rise in commodity prices is simply the extension of the structural bull rally in commodities that is now in its ninth year, and the fact that the rally continues in the midst of an economic slowdown simply serves to highlight the fact that this bull rally is structural, not cyclical," analysts at Goldman's said, warning that prices will probably remain at higher levels until significant investment increases production capacity to a level capable of meeting future demand projections.

"Solving the politically driven supply constraints will be a very difficult and protracted process which will likely lead to explosive prices in the next couple of years, with oil prices potentially spiking toward 175 usd a barrel, particularly should growth in the G7 re-accelerate in 2009 and beyond."

Goldman Sachs was one of the first investment banks to predict oil prices at 100 usd a barrel. They recently increased their 2008 average price forecast to 105 usd a barrel.