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Oil falls as reports of swine flu rattle market

OIL prices dipped to around US$50 a barrel yesterday as a strong dollar and new reports of swine flu threatened to slow summer travel and sent jitters through global markets.

Benchmark crude for June delivery fell US$1.41 to settle at US$50.14 on the New York Mercantile Exchange.

In London, Brent prices fell US$1.35 to settle at US$51.67 a barrel on the ICE Futures exchange.

Crude prices have defied traditional market fundamentals for weeks and risen in the face of an awful economy and growing supplies of oil.

Swine flu worries pushed both oil and equity markets down yesterday.

Oil recovered a bit from the day's bottom of US$48.01, but talk of a pandemic continued to weigh on prices, said Jim Ritterbusch, president of energy consultancy Ritterbusch and Associates.

"You can say connect the dots in the oil and say, yeah, this is going to reduce jet fuel demand when people travel less," Ritterbusch said.

Analyst Daniel Flynn of Alaron Trading Corp. said prices will likely bounce back when fears about the spread of swine flu dissipate.

But while oil has been able to defy fundamentals, the same cannot be said for natural gas. Prices fell to fresh seven-year lows yesterday, and the May contract fell another 4 cents to US$3.257 per 1,000 cubic feet.

"This begs the question ... if the fundamentals for oil are so bullish ... then why is natural gas still tanking?" analyst and trader Stephen Schork asked.

Some traders, including Schork, believe natural gas markets do not attract the same amount of speculative trading, and thus are a better gauge of the economy and market fundamentals.

As of Friday, the July natural gas contract is down 41 percent since the start of the year while the crude contract the down only 2 1/2 percent. Schork said the excursion between the oil and natural gas markets makes little sense.

"In other words, crude oil is extremely overbought compared with natural gas," he said. "We think a regression to the mean is due."

Meanwhile, retail U.S. gasoline prices fell two-tenths of a cent overnight to a national average of US$2.05 for a gallon (54 cents a liter) of regular unleaded, according to auto club AAA, Wright Express and Oil Price Information Service. Gas is US$1.55 a gallon cheaper than it was last year at this time.

Even in a severe recession, that's a sliver of good news for consumers.

Oil has traded near US$50 a barrel this month, about a third of its record high in July, as the global economy remains weak and traders grapple with an uncertain outlook for recovery.

The dollar gained a penny against the euro yesterday. A stronger U.S. currency makes oil more expensive because barrels of oil are bought and sold in dollars.

Stock market investors continue to plod through a deluge of mixed earnings reports, and Wall Street awaits results of the government's stress tests of the 19 largest U.S. banks. Regulators briefed bank officials on Friday, but the results will not be publicly released until May 4.

Wednesday's release of the Commerce Department's advance estimate of economic growth figures for the first quarter of the year should hint to the state of any recovery.

Although oil prices in the short term could go either direction, investment adviser group Raymond James believes prices will rebound somewhat by 2010, but left the door open to a strong comeback for energy prices.

Analyst J. Marshall Adkins maintained the group's 2010 price forecast of US$65 a barrel.

"While we are confident that 2010 crude prices will be higher, the magnitude of the improvement is still very much up in the air," Adkins wrote in a client note. "If the global economy stabilizes or improves in 2010, these estimates will likely move much higher."

On Sunday, Abdalla el-Badri, Secretary General of the Organization of Petroleum Exporting Countries, warned that oil prices of US$50 per barrel are "insufficient for continued investment" and urged that prices rise to US$70 barrel.

OPEC has announced output quota reductions of 4.2 million barrels a day since September.

"Against our initial expectations, OPEC production cutbacks have been very significant," said a report on the energy sector by Bank of America-Merrill Lynch, which estimated cuts of 5.3 million barrels day since July, "helping create a floor to global crude oil prices."

At the same time, the report said there was "little potential for energy price spikes in the next 12 months even if the global economy recovers."

In other Nymex trading, gasoline for May delivery fell 3.88 cents to settle at US$1.4032 a gallon and heating oil slid 4.54 cents to settle at US$1.3229 a gallon.


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