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Oil trades below US$78 as US dollar strengthens

OIL prices fell to below US$78 a barrel yesterday on a stronger dollar and worries that a drop in consumer spending might make the US economic recovery unsustainable.

Benchmark crude for December delivery fell US$2.87 to settle at US$77 a barrel on the New York Mercantile Exchange. The contract rose US$2.41 to settle at US$79.87 on Thursday and has traded near US$80 a barrel all week.

Oil has been moving higher recently on signs that the US economy is improving and on a weaker dollar. The Commerce Department said Thursday that the US economy grew at a 3.5 percent annual pace in the third quarter, the best showing in two years and breaking four straight quarters of declines.

Since oil is largely bought and sold in dollars, investors holding stronger currencies can buy more crude for less.

But the dollar rose yesterday, and crude fell sharply, mostly on a dour consumer spending report.

The Commerce Department said US consumer spending plunged in September by the largest amount in nine months. And evidence that US consumers are still holding off on spending drove stocks sharply lower, tempering enthusiasm from the day before over the economy's growth in the third quarter.

A drop in the mood of consumers added to the day's bad news.

The market is paying close attention to indicators of consumer spending, which is still in a slump despite improvements in other parts of the economy such as manufacturing and housing. Consumer spending makes up two-thirds of the overall US economy.

Despite some recent positive economic reports, some analysts remained guarded about the strength of the global economic recovery.

JBC Energy in Vienna said that "oil still looks to be overpriced and an increase in GDP after four quarters of decreases does not mean the US, or the rest of the world, is out of the woods yet."

Analysts point to still fragile demand and the accumulation of huge stocks of oil and petroleum products as reasons to be cautions.

The dollar rose yesterday, with the euro dropping to US$1.4796 in New York morning trading from US$1.4845 late Thursday. The British pound fell to US$1.6520 from US$1.6548.

In other Nymex trading, natural gas fell 1.7 cents to settle at US$5.045 per 1,000 cubic feet. Heating oil fell 7.31 cents to settle at US$1.9811 a gallon. Gasoline for November delivery fell 7.6 cents to settle at US$1.9432 a gallon.

In London, Brent crude for December delivery fell US$2.84 to settle at US$75.20 on the ICE Futures exchange.


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