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Energy prices slump on surplus of oil in storage

OIL prices took a dive yesterday after a U.S. government report on unused crude in storage suggested the month-long rally in energy prices may have been premature.

After rising for seven straight days and threatening to break the US$70 barrier, benchmark crude for July delivery tumbled 3.5 percent, or US$2.43, to US$66.12 a barrel on the New York Mercantile Exchange.

The catalyst was a report from the Energy Department's Energy Information Administration, which said crude in storage rose by nearly 3 million barrels, which is about 20 percent above year-ago levels.

Even though most analysts say crude is still overpriced, the market has created its own momentum with an enormous amount of money fleeing equity and currency markets.

In addition to huge amounts of oil in storage, the weak dollar that has attracted crude investments for weeks rebounded somewhat yesterday, sending a number of investors scurrying.

The crude storage report was simply the third part of a "triple whammy" said Jim Ritterbusch, president of energy consultancy Ritterbusch and Associates.

Crude and gasoline prices tumbled through most of the year as storage facilities filled up. Heavy industry and individual consumers had pulled back sharply on energy spending. A rebound for energy prices began in early May as the dollar began to weaken.

Oil is essentially cheaper when the dollar falls because crude is priced in the U.S. currency.

Wednesday's report sent a jolt through the market.

Yet with so much money flowing into the market, prices are likely to hold close to where they are, until market fundamentals can take hold. That could happen as early as this summer, said oil analyst and trader Stephen Schork.

There are few signs that energy demand has rebounded strongly, despite some glimmers of optimism from the manufacturing sectors in Europe, China and the United States. Heavy industry is a big energy consumer, particularly of natural gas.

Natural gas futures plunged nearly 9 percent yesterday. Earlier this week, there was a rush of money into natural gas, which looked like a bargain next to oil.

That optimism, at least on yesterday, appeared misplaced.

"It seems like the prices have gotten a little ahead of themselves," said Chip Hodge, managing director of MFC Global Investment Management in Boston.

There is a danger that high energy prices could slow any economic recovery, beginning on the level of the individual consumer who must fill up the gas tank.

Hodge said he doesn't think oil prices will rise above US$70 per barrel until there's some kind of uptick in demand.

In other Nymex trading, gasoline for June delivery slipped 2.36 cents to settle at US$1.9016 a gallon and heating oil fell by 5.95 cents to settle at US$1.7384 a gallon. Natural gas for June delivery tumbled 35.4 cents to settle at US$3.766 per 1,000 cubic feet.

In London, Brent prices lost US$2.29 to settle at US$65.88 a barrel on the ICE Futures exchange.


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