Oil dropped more than 2 percent on Monday, falling from 32-month highs on concerns that rising fuel costs will erode demand and threaten economic recovery. Analysts and brokers pointed to overbought technicals along with mounting concerns about demand, highlighted by Goldman Sachs telling clients there is a strong chance commodity prices may reverse and recommending they take profits.
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Goldman as well as fuel price tracker Trilby Lundberg pointed to demand destruction from high gasoline prices.
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Brent and US crude felt pressure early when the African Union said Muammar Qadhafi had accepted a roadmap to end Libya's civil war, including an immediate ceasefire, though rebels said any settlement would require Qadhafi step down. But Qadhafi's forces continued to shell the besieged town of Misrata, and a NATO official said government armour would be targeted as long as it threatened civilians.
Brent crude for May fell $2.67 to settle at $123.62 a barrel, dropping as low as $123.50 in post-settlement trading, after reaching a 32-month peak of $127.02. US crude fell $2.87 to settle at $109.92, pulling back after reaching an early $113.46 peak, the highest intraday price since September 2008.
"Technicals indicated crude was overbought, with RSI (relative strength index) for both Brent and WTI over 70 this morning," said Richard Ilczyszyn, senior market strategist at Lind-Waldock in Chicago. The 14-day RSI, a measure of whether a contract is overbought or oversold, approached 80 on Friday for Brent, according to Reuters data. A reading above 70 is considered overbought, while anything under 30 is oversold.
The average US retail gasoline price moved closer to $4 a gallon, jumping more than 19 cents since mid-March to a level less than 10 percent below its all-time high, according to the widely followed Lundberg Survey. Goldman cited "nascent signs of oil demand destruction in the United States" and to speculative length, along with the possibility of a Libya ceasefire and Nigeria's elections that have thus far not resulted in unusual supply disruptions. The International Monetary Fund warned in its World Economic Outlook that soaring oil prices and inflation in emerging economies pose risks to the world economy but are not yet strong enough to derail it.
Demand concerns also remain over Japan, which expanded the evacuation zone around its damaged nuclear plant because of high levels of accumulated radiation, as a strong aftershock rattled the area one month after a massive quake and tsunami. Weekly oil inventory reports will offer a fresh snapshot of US demand and stockpiles. Analysts surveyed on Monday expected crude stocks to have risen last week, with distillate stocks dipping and gasoline stocks dropping.
Oil data from industry group the American Petroleum Institute is due at 4:30 p.m. EDT (2030 GMT) on Tuesday. Analysts remain sceptical about the prospect for any Libyan peace deal. Commerzbank's Carsten Fritsch said: "We have seen such peace plans before ... Unless Qadhafi steps down I think there is little room for discussion from the rebel side."
With Libyan production curbed sharply, Saudi Arabia is still expected to fill any supply gap, which makes unrest and protests in regional neighbours Yemen, Bahrain, and Syria and revived unrest in Egypt, that much more unsettling. A senior Gulf source dismissed doubts among analysts about Saudi Arabia's claimed 12.5 million barrels per day capacity as the work of speculators trying to manipulate oil prices.