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Oil falls below US$83 on stronger dollar

OIL prices fell below US$83 a barrel yesterday as the dollar strengthened and investors worried a 20 percent rally in the last few weeks isn't justified amid sluggish U.S. crude demand.

Benchmark crude for February delivery fell 52 cents to settle at US$82.66 a barrel on the New York Mercantile Exchange as the dollar rebounded. On Wednesday, the contract rose US$1.41 to settle at US$83.18, a 15-month high.

Investors have brushed off signs of weak U.S. oil demand while bidding up crude prices from US$69 a barrel in mid-December. The Energy Department's Energy Information Administration said Wednesday that crude supplies rose last week.

"Above the US$83 level, we would be viewing this price advance as falling within the 'bubble' category, a scenario that could play out in a much sharper than expected price plunge," Galena Illinois-based Ritterbusch and Associates said in a report.

Analysts have also attributed the rally in part to technical buying and the growing presence of investment funds in the market, instead of the basics of supply and demand.

Cold weather in parts of the U.S., Europe and Asia has helped support the recent jump in oil prices, as traders expect supplies of crude products such as heating oil to run low.

"With a colder-than-usual winter in most parts of the Northern Hemisphere, oil prices remain buoyant and well supported," Barclays Capital said in a report. "The cold snap that has engulfed the U.S. has led to a plunge in heating oil inventories."

Others were more bearish, noting that U.S. distillate stockpiles, which include heating oil, were at their highest level at the start of the year since 1985 and that the United States recently became a net exporter of such products.

The recent run-up in gasoline prices has had nothing to do with demand for gasoline that is so weak that U.S. refiners have been shutting down operations and scaling back others. The government said Wednesday that refineries operated at just 79.9 percent capacity for the week ended Friday, well below historical averages.

The average gallon of gas is now a shade under US$2.71.

In fact, winter storms have driven gasoline demand down sharply because Americans have been unable to drive.

Oil prices were also under pressure from gains made by the dollar on other currencies, making crude more expensive for non-dollar investors.

The dollar gained broadly yesterday as European economic data suggested a weak, slow recovery and the new Japanese finance minister called for a weaker yen.

Money has flooded into oil futures because the dollar has been so weak, making it cheaper for anyone holding stronger currencies to buy crude.

In other Nymex trading in February contracts, heating oil fell 1.96 cents to settle at US$2.1836 a gallon and gasoline dropped less than a penny to settle at US$2.1349 a gallon. Natural gas futures fell 20.3 cents to settle at US$5.806 per 1,000 cubic feet.

In London, Brent crude for February delivery fell 38 cents to settle at US$81.51 a barrel on the ICE Futures exchange.


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