Oil falls to lowest level in nearly 3 months

Crude futures end the day more than $2.50 lower after OPEC president says there is adequate supply and prices are much too high.

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By Kenneth Musante, CNNMoney.com staff writer

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Oil prices have fallen more than 15% since setting a record on July 11, but prices remain nearly 65% higher than a year ago.
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NEW YORK (CNNMoney.com) -- Oil prices closed at the lowest level in nearly three months on Tuesday, after a selloff was sparked by comments from OPEC's president and sustained by ongoing worries about a slowdown in demand.

Light, sweet crude for September delivery slid $2.54 to end the day at $122.19 a barrel on the New York Mercantile Exchange, after having fallen as low as $120.42 earlier in the day.

Tuesday's price represents crude's lowest level since May 6, when prices settled at $121.84 a barrel.

The drop began after Chakib Khelil, president of the Organization of Petroleum Exporting Countries, told reporters in Jakarta, Indonesia, that the oil markets were being supplied with plenty of oil to meet demand, and that prices were being inflated by geopolitical tensions.

"Comments out of somebody like this definitely carry a lot of weight, especially with the market so nervous," said Neal Dingmann, senior energy analyst at Dahmlan Rose & Co.

The threat of a conflict between the West and Iran has raised major concerns about supply from the Middle East. However, there has been little saber rattling from either side since they met to discuss the oil producer's nuclear program over a week ago.

Khelil expressed little concern about supply disruption, saying "I think there is a good supply, there is a balance in the market," according to reports.

But he also didn't see a decline in demand - and that view appeared to run counter to the prevailing market sentiment.

"There's a sense that supplies are not as tight, [but] you can't run away from the fact that demand is getting crushed," said Phil Flynn, senior market analyst at Alaron Trading in Chicago.

One side effect of the decline was a surge in the dollar, which hit a one-month high versus the euro on Tuesday. Oil has been used as a hedge against the dollar in its recent decline.

"If the dollar continues to strengthen and the political situation [with Iran] improves, then the long-term prices will be about $78 [a barrel]," said Khelil, who is also Algeria's oil minister. He spoke to reporters while visiting Indonesia's energy minister.

Price drop: Crude prices have fallen by double digits over the past two weeks as oil investors worried that high prices for fuel made from crude oil have seriously damaged demand.

Average prices for regular gasoline in the U.S., the world's largest oil consumer, fell for the 12th straight day Tuesday, but remained near $4 a gallon - more than 36% higher than they were a year ago.

Oil has fallen 15% from its trading peak of $147.27 set July 11, though prices remained nearly 65% higher than they were 12 months ago.

"The market is more focused on the fundamental economics aspects than the geopolitical aspects," said Tom Orr, head of research at Weeden & Co.

Nigeria: Worries about a demand slide also overshadowed disruption in demand from Nigeria, Africa's largest oil producer.

Prices spiked in early trading after reports revealed that militants in Nigeria had damaged two oil pipelines operated by Royal Dutch Shell (RDS.A), but then retreated.

Rebel attacks on Nigeria's oil infrastructure have been a constant concern for oil investors, and a factor that some analysts believe is already included in the market price.

Speculation?: Oil investors, who have been blamed for pushing oil to record levels, have caught on to the trend of declining demand, according to one trader.

"Basically, as they [speculators] were the villains of pushing the market to extreme levels very fast... they're now doing the opposite," said James Cordier, founder of OptionSellers.com in Tampa, Fla., who referred to himself as a speculator.

In a report released Monday, the Commodity Futures Trading Commission said that, last week, more investment funds held "short" positions - betting that prices will continue to fall - than those that bet "long" - that prices will keep climbing.

It was the first time that short positions have outweighed long positions since the start of 2007, when oil prices began climbing, according to Nauman Barakat, energy trader at Macquarie Futures USA, in a research note. To top of page

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