Oil falls despite Georgia strife
Investors worry more about slowing global demand for crude than about disruption of supplies flowing through the embattled region.
NEW YORK (CNNMoney.com) -- Oil prices declined Tuesday as investors wrestled with ongoing concerns about falling global demand and worries about supply disruption in Eastern Europe.
U.S. crude for September delivery fell $1.44 to settle at $113.01 a barrel on the New York Mercantile Exchange. Earlier it had climbed $1.50 to $115.95 a barrel on concerns that fighting in Georgia would disrupt the flow of oil between Asia and Europe.
But concern about supply disruption in the region failed to keep prices higher as investors worried that slower non-U.S. economic growth would eat away at demand.
Oil's recent price slide has knocked about $34, or 23%, from oil's peak price of $147.27 on July 11.
"Unless it worsens, the Georgia-Russia conflict is having comparatively little impact compared to what it would've done [had it happened] in June," said Ann-Louise Hittle, oil analyst at Wood Mackenzie.
Georgian conflict: The Presidents of Russia and France proposed a six-point cease-fire plan to end the conflict which began last week.
French president Nicolas Sarkozy emphasized that the cease-fire plan was designed to halt the fighting, but did not address the issues that sparked the initial hostilities.
Russian president Dmitry Medvedev called a halt to military operations in Georgia on Tuesday morning, but the Georgian government claimed Russian war planes were still bombing targets inside the small country.
Georgia had not yet agreed to Sarkozy and Medvedev's cease-fire plan.
Georgia produces very little oil but serves as an important hub for transporting crude and natural gas between Europe and Asia. Complete victory by Russia could give the country control of all the oil and natural gas flowing through the region.
BP pipeline: Oil company BP said early Tuesday that it had shut down the Baku-Supsa pipeline, which carries 90,000 barrels of oil per day through the embattled nation of Georgia, for fear that it could be damaged during the fighting.
BP has a 30% stake in the pipeline as part of a multinational venture based in Turkey. The Baku-Supsa line carries crude through the western part of Georgia from the Black Sea.
The country's Baku-Tbilisi-Ceyhan pipeline had already been shut down before Russian and Georgian forces began clashing in the breakaway province of South Ossetia. That pipeline had been closed due to an unrelated fire on its Turkish span.
BP also said that the South Caucusas pipeline, which carries natural gas from Azerbaijan, had also been shut down. Another oil pipeline, which is used by BP but not owned by it, remained open.
Oil has been trending lower since the end of July and continued to fall on Monday, despite the start of fighting over the weekend. The last time the commodity settled below $113 was on May 1, when the market closed at $112.52 a barrel.
"The fact that oil didn't go up immediately was partly a reflection of market sentiment, and partly a reflection that the big pipeline had already been out of action before the hostilities started," said Kevin Norrish, commodities analyst with Barclays Capital in London.
Falling demand: Worries about supply disruption in Georgia served as a counter to sentiment that the global economy, and thus demand for oil, is slowing.
"The net result was not much change in the oil price," said Norrish.
China reported Monday that crude oil imports had fallen 7% in July, compared to a year earlier, underscoring concerns that the high price of crude oil and products made from it are taking a toll on consumption in Asia.
The International Energy Agency, which guides the energy policies of 27 member nations in Europe, Asia and North America, also lowered its demand forecast to 48.6 million barrels a day for the year.
But the watchdog said it is too early to tell if this is a lasting trend. The group also urged caution, saying that despite oil's recent declines, prices will remain expensive, especially for poorer nations.
Dollar eases: A weaker dollar also added downward pressure to oil prices. The dollar fell slightly Tuesday, though it has surged against the euro in recent days.
Oil is traded in dollars, so when the dollar weakens, crude oil becomes relatively cheaper to foreign investors. Oil and other commodities are also commonly used as a hedge against inflation.
Recent gains have been driven both by weakness in the economy of the 15-nation euro zone, and falling oil prices.
"Everybody thought the rest of the world was going to be immune from the slowdown in the economy, and I think people are realizing this is not the case," said Phil Flynn, senior market analyst with Alaron Trading in Chicago.
Gasoline: Many investors believe the rising price of crude oil and gasoline has begun to cut demand in the United States, the world's largest oil consumer.
The average price of retail gas in the U.S. has fallen more than 31 cents to $3.799 a gallon at the pump over the past 26 days. But gas prices remain more than a dollar higher than where they were 12 months ago. 
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