Processing Magazine

Oil falls as South American tensions ease

March 12, 2008
The Associated Press is reporting that oil prices were lower recently as traders booked profits after last week''s record highs and amid easing tension between oil producers Venezuela and Colombia over the weekend.

Cold weather in the United States and the continuing weakness of the U.S. dollar were seen as bullish factors supporting prices.

Light, sweet crude for April delivery fell 61 cents to $104.54 a barrel in electronic trading on the New York Mercantile Exchange by midday in Europe.

The contract set a new trading record of $106.54 a barrel on Friday before retreating to settle at $105.15 a barrel, down 32 cents.

In London, Brent crude futures dropped 60 cents to $101.78 a barrel on the ICE Futures exchange.

Crude contracts had risen above $106 a barrel on Friday after a weak U.S. jobs report that fueled hopes the Federal Reserve would continue cutting interest rates.

Worries about a crisis in the Andes subsided after Venezuela said Sunday it was restoring full diplomatic ties with Colombia after they were broken off following a cross-border Colombian attack on a leftist rebel camp in Ecuador.

Last week, rebels attacked and shut down a Colombian pipeline that transports 60,000 barrels of oil a day in retaliation for the Colombian raid into Ecuador. Venezuela threatened to slash trade and nationalize Colombian-owned businesses, and Venezuela and Ecuador briefly sent troops to their borders with Colombia.

The surge to a new record was driven by a U.S. Labor Department report that said employers cut 63,000 jobs in February - the biggest drop in five years.

Investors can react to such news in one of two ways: by selling on the prospect that the economy - and demand for oil - is cooling, or by buying on a conviction that bad economic data makes it more likely the Fed will cut rates. On Friday investors engaged in a little of both, sending oil prices down more than a dollar at one moment and propelling them to new records the next.

Lower interest rates tend to weaken the dollar. Many analysts believe a weak dollar is the reason oil set new inflation-adjusted records four times last week and has risen 23% in less than a month.

Crude futures offer a hedge against a falling dollar, and oil futures bought and sold in dollars are more attractive to foreign investors when the dollar is falling. Most investors believe that despite occasional rebounds, the dollar is likely to keep falling as the Fed continues to cut rates.

But while analysts expect oil''s underlying supply and demand fundamentals to eventually pull down its price, few are willing to predict when that will happen. Meanwhile, oil could continue rising to as high as $120 a barrel in the short term, according to some forecasts.