US crude slips below $109, shrugs off Saudi output cut

SINGAPORE: US crude futures slipped below $109 a barrel on Monday after three days of gains, as fears that high prices would dampen demand overrode concerns over a cut in oil output.

Saudi Arabia's oil minister said on Sunday the kingdom had slashed output by 800,000 barrels per day in March due to oversupply, sending the strongest signal yet that OPEC will not act to rein in soaring prices.

"The market had a great run on Friday, but oil continues to underpin inflationary fears as people start to worry how high it's going to get," said Ben Le Brun, market analyst with CMC Markets in Sydney.

Oil prices fell early last week on concern that demand may be eroding under pressure from high prices, but rebounded on Friday following encouraging US economic data. Prices have retreated after hitting a 2-1/2 year peak of $113.46 earlier this month.

US crude futures for May fell 76 cents to $108.90 a barrel by 0546 GMT, after falling as much as 94 cents earlier.

ICE Brent crude for June was down 57 cents at $122.88 a barrel. The contract gained as much as 21 cents in early trade.

Brent oil may revisit a recent low at $120 per barrel, while US oil is expected to retrace to $108 per barrel, according to Reuters market analyst Wang Tao.

Oil Ministers from Kuwait and the United Arab Emirates echoed Saudi Arabia's Ali al-Naimi's concerns about oversupply and said rocketing crude prices were out of the hands of OPEC, which next meets in June.

Naimi's words are the clearest indication yet that OPEC is unconvinced there is a need for more oil despite the civil war that has slashed Libyan output and expectations Japanese demand will rise as the country scrambles to rebuild its earthquake-shattered electricity grid.

"The Saudis believe that there is a massive premium because of tensions in the Middle East and that demand is waning at these prices. We think the premium is around $15-$20 a barrel," said Le Brun.

The conflict in Libya escalated over the weekend, after Libyan leader Muammar Gaddafi's forces fired rockets on Sunday at rebels stationed along the edge of Ajdabiyah, sending some residents fleeing from the eastern town, witnesses said.

The oil market is still seeking an appropriate replacement for very high quality Libyan sweet crude oil lost due to the conflict in the North African nation and refiners are not buying proposed replacements, OPEC Secretary General Abdullah Al-Badri said on Monday.

"The Saudis have spare capacity but there is a quality mismatch between what refiners want and what the Saudis can provide," said Michael Lo, a Hong Kong-based analyst with Nomura International.

CHINA RAISES BANK RESERVES

China raised banks' required reserves on Sunday for the fourth time this year to curb inflation, but the impact on oil prices is expected to be muted as it was widely expected, analysts said.

"The market would have taken the news in its stride. I don't think there will be any significant impact on prices as it's a move that was widely anticipated," said Lo.

Reflecting this sentiment, both Chinese and Hong Kong stocks were trading higher on the day after opening lower.

The reserve rate rise, which followed an increase in benchmark bank interest rates on April 5, was the seventh since China stepped up efforts against inflation in October and underscored the government's determination to keep the economy on an even keel.

Asian equities edged up on Monday, receiving a boost from a strong Wall Street close, riding on the back of encouraging US data.

The market will be closely watching a clutch of key US corporate earnings during this holiday-shortened week to gauge the impact of high oil and commodities prices on the world's biggest energy consumer.