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Oil prices up, but decline for the month

OIL prices posted their first monthly decline since January with summer driving season petering out and petroleum stockpiles piling up.

Analysts said the flattening of oil prices in July could be a prelude to an extended drop. Speculators may continue to pump money into energy markets, but an oversupply of crude and natural gas will cool off any prolonged price increases.

Crude ended July 44 cents a barrel cheaper than the month before. The last time that happened was six months ago when a barrel of oil dropped by US$2.92 during the month of January. Yet crude prices at one point during that month fell as low as US$32.70.

Volatile oil markets this week show just how tricky it's been to put a price on energy when there are so many questions about the pace of any economic recovery that could boost demand.

The fact that there are enormous amounts of oil and gasoline has not stopped energy prices from rising for most of the year, however.

Benchmark crude for September delivery rose US$2.51 to settle at US$69.45 a barrel yesterday on the New York Mercantile Exchange, after dipping 3 percent earlier in the day. Prices have swung wildly for days.

The same weak economy that has driven down demand for gasoline, natural gas and crude has driven the value of the dollar down sharply, and it did so again yesterday.

When the dollar sinks, it effectively makes crude cheaper because it's priced in the U.S. currency. Investors have pumped billions of dollars into energy commodities as a hedge against the weak dollar.

Yet energy prices are also rising on the belief that the worst of the recession is past, and that it won't be long before countries, particularly the U.S., begins consuming more energy.

If job numbers pick up, manufacturers ramp up production and consumers break out of a yearlong slump, economists expect surplus crude will quickly be soaked up, forcing prices much higher.

This week, however, it was the CEOs for the world's largest oil companies saying that they don't see that happening any time soon.

Crude slumped 6 percent Wednesday, with BP's Tony Hayward saying that any economic recovery that would boost demand will be "long and drawn out."

Markets roared back the next day wiping out those declines.

The price swings have created whiplash on Nymex and other commodity markets, with one group selling crude because there is so much supply, and another group buying on the belief that future demand will send prices higher.

"The two sides disagree, and they have similar amounts of money to put into the market," said Michael Lynch, president of Strategic Energy & Economic Research.

Lynch added he expects investors will eventually realize that American energy consumption won't return so easily.

"The market doesn't work that way," he said. "People who are waiting for demand to recover are going to take their money and put it somewhere else."

Already, crude futures for the months ahead are rising. That's not necessarily an indication that demand for oil will increase toward the end of the year. Rather, it's a premium placed on not having to take delivery of oil in a terrible economic environment.

Refiners that make gasoline have seen the same economic numbers and have been cutting back production because of a glut in gasoline. That has helped push gasoline prices higher for 10 straight days.

The national average for a regular unleaded added less than a penny overnight to US$2.517 a gallon (66 cents a liter), according to auto club AAA, Wright Express and Oil Price Information Service. Gas is still 11.3 cents a gallon cheaper than last month, and it's US$1.392 a gallon (36 cents a liter) cheaper than last year.

Crude prices slumped early yesterday, and then rebounded when the Commerce Department said that the economy sank at a pace of 1 percent in the second-quarter. Many economists were predicting a bigger decline and took the report as another sign that the country was pulling itself out of the longest recession since World War II.

At the same time, Commerce said consumers are holding onto their cash and cut spending by 1.2 percent in the second quarter. Consumers, and businesses, have cut back on energy costs and that shows up every week when the government reports storage levels of crude, gasoline, and natural gas. The Energy Information Administration reported Wednesdays that crude levels jumped by more than 5 million barrels.

In other Nymex trading, gasoline for August delivery added 5.73 cents to settle at US$2.0448 a gallon and heating oil rose 2.51 cents to settle at US$1.7938 a gallon. Natural gas for August delivery fell 9 cents to settle at US$3.653 per 1,000 cubic feet.

In London, Brent prices climbed US$1.59 to settle at US$71.70 a barrel on the ICE Futures exchange.


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