Oil prices drop on stronger dollar, weaker demand

PERTH: Oil prices fell on Monday, weighed down by a stronger dollar and weaker demand, with investors eyeing a Group of 20 meeting later this week which will focus on the European debt crisis.

The US dollar climbed to a three-month high against the yen on Monday after Japan intervened in currency markets to stem the yen's rise. The US dollar index also rose around 1.5 percent against a basket of currencies.

"The dollar is stronger against the euro -- that is pushing down the commodity markets," said Masaki Suematsu, a broker at Newedge brokerage in Tokyo.

"Last week WTI and Brent were stronger and it's a correction because the market fundamentals are not so strong."

Prices had rallied on news of a euro zone deal last week to recapitalise their banks, strengthen the euro zone rescue fund and impose hefty losses on holders of Greek debt, but uncertainties about the plan have put pressure on the market.

"The key will be this optimism out of the EU. It doesn't translate into demand today and probably not even tomorrow, it's just that mere fact that a plan is at hand is buoying prices," Jonathan Barratt, managing director of Commodity Broking Services in Sydney, said.

Brent crude fell 96 cents, or 0.9 percent, to $108.95 a barrel by 0530 GMT after closing at 109.91 on Friday. Brent traded between $108.60 and $110.33 per barrel.

US crude fell 94 cents to $92.38 per barrel, trading between $93.80 and $92.32 per barrel.

A reasonable price for crude oil is between $80 and $100 a barrel, United Arab Emirates Oil Minister Mohammed bin Dhaen al-Hamli said on Monday at the Singapore International Energy Week (SIEW) conference.

He said a high oil price would lead to more investment in alternative energy and also more investment in crude production capacity, which would mean less volatile prices.

Speaking at the same conference, Nobuo Tanaka, former executive director for the International Energy Agency (IEA), said an oil price of between $70 to $80 a barrel was just right, adding that prices of $100 or more will derail global economic growth, just as the record prices preceding the 2008 financial crisis did.

Over the weekend, Spain and Portugal called for the United States and other G20 powers to take action to help contain the fallout from the European debt crisis at the G20 summit, which will take place in Cannes, France, on Nov. 3-4.

British Prime Minister David Cameron, writing in the Financial Times on Monday, urged colleagues at home and abroad to avoid talking down domestic and global economic prospects.

In the United States, mixed economic data did little to support oil prices. Sluggish income growth made US households cut back on saving in September to raise their spending, though a separate report showed consumer morale in the world's largest economy brightened in October.

The market was also eyeing weather in the US Northeast, which was hit with an early winter storm, leaving more than 3 million households without power on Sunday and killing at least eight people.

A cooler winter in the world's top oil consumer could bolster global energy prices, but the early storm was viewed largely as a fluke.

"For all intents and purposes, we're still meant to get a coolish winter, but nothing too much of an extreme and so far this seems to be just a little bit of an aberration on that," Barratt said.

Copyright Reuters, 2011