Oil dips below $126 after U.S. market probe

Filed on May 30, 2008

LONDON - Oil dropped below $126 on Friday after a regulatory probe into possible price manipulation added to trader caution and a stronger U.S. dollar offset the impact of a big drop in U.S. crude stocks.

U.S. crude dipped 77 cents to $125.85 a barrel by 1030 GMT. London Brent dropped 49 cents to $126.40.

Prices hit an all-time high of $135.09 a barrel last week, driven by concern supplies will struggle to match demand over the long term, as well as a weak U.S. currency, which makes dollar-denominated commodities attractive to investors.

Since then, the market has fallen by around $10, pulled lower by mounting evidence that in the short term high prices have begun to erode demand.

An announcement on Thursday of an investigation by U.S. regulator the Commodity Futures Trading Commission (CFTC) heightened the cautious mood.

"A rebound in the dollar, speculation about U.S. interest rate hikes and the announcement by the CFTC of measures to enhance the oversight of energy futures markets may be seen as potentially stemming future investment flows into energy and other commodities," said Antoine Halff of Newedge USA.

The dollar, which had fallen to record lows against the single European currency, rallied on Friday after data drove concern about a weaker European economy.

U.S. crude fell by more than $4 a barrel on Thursday even though U.S. government data showed U.S. crude stocks had fallen to their lowest level since 2004.

Demand from U.S. oil refiners has increased following the onset of the U.S. driving season.

But motorists have cut back on use and traders also expected Asian consumption to fall because of the reduction of fuel subsidies in some Asian countries, which have been costing governments millions.

"The level of demand is not expected to continue in the long run," one trader said.

On Thursday Indian Oil Minister Murli Deora said the government would take a decision on raising fuel prices in the next two to three days. Taiwan, Indonesia and Sri Lanka have already raised domestic fuel prices.

Yet South Korea said on Friday it might cut taxes on fuel to ease price pressures as transportation workers threaten to strike.

Thailand said it was selling fuel at a discount to bus companies after a one-day strike.

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