Oil stages late-day rally amid Mideast tensions

Crude futures end the day up $1.47 as tensions in the oil-rich countries of Nigeria, Iran prompt supply concerns that overshadow declining demand.

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By Catherine Clifford, CNNMoney.com staff writer

If gas prices continue to go down, I will:
  • Go back to old driving habits
  • Drive the same way I do now
  • Still find new ways to save gas

NEW YORK (CNNMoney.com) -- Oil prices staged a late-day rally Monday, after dithering on either side of break-even for most of the session, as investors watched mounting geopolitical tensions in oil-rich countries.

U.S. crude for September delivery rose $1.47 to settle at $124.73 a barrel on the New York Mercantile Exchange.

Prices rose as much as $1.96 a barrel and dipped as much as 63 cents a barrel during morning trading as investors weighed supply concerns with declining demand.

Iran's nuclear developments. Oil prices gained support from increased concerns over Iran's nuclear development program.

Iranian president Mahmoud Ahmadinejad said Saturday that the country operates twice the number of uranium-enriching machines than previously announced, according to the Associated Press.

Iran is one of the largest contributors to the global supply of oil.

Even though demand has been decreasing on record high oil prices, geopolitical tensions that threaten supply channels still affect the market, said Andrew Lebow, an energy analyst at MF Global in New York.

"Things are still tight, prices are still unbelievably high on a historical basis," he said. "So all of these geopolitical upsets still have meaning."

Nigerian rebel attacks also rankle prices. The Nigerian rebel group, Movement for the Emancipation of the Niger Delta, destroyed oil pipelines in the southern part of the country early Monday. The rebels said they believe that both pipelines belong to the Shell Petroleum Development Company.

Nigeria is the fourth-largest supplier of oil to the United States.

"If we lose much oil in Nigeria, it quickly takes away any sort of cushion we have in the overall picture," said Neal Dingmann, senior energy analyst at Dahlman Rose & Co.

In addition, the oil that comes out of Nigeria is very clean when it comes out of the ground, cutting down on the amount of refining and making it very valuable, said Dingmann.

Big money bets oil prices will fall. A majority of big investment funds that buy oil are expecting a drop in oil prices, according to the Commodity Futures Trading Commission's weekly Commitments of Traders report.

The report shows how many "long" and "short" positions are being held by these funds. Short positions translate into bets on falling oil while long positions reflect bets on rising prices.

In the most recent CFTC weekly report, index money (or investment funds) favored falling oil prices, with more funds registered as holding short positions.

This is the first time that short positions have outweighed long positions since the start of 2007 when a barrel of crude oil was trading for about $50, according to Nauman Barakat, energy trader at Macquarie Futures USA, in an energy note to clients.

Oil's recent slide. Oil prices climbed to record highs above $147 a barrel earlier this month, but have since fallen more than $22 as reports have indicated that record high prices of crude oil and gas have been motivating consumers to lower their demand.

"The market is finally taking into serious account the effect that high prices have on demand - not only in the United States, but globally," said Lebow.

He said that one of the reasons oil prices have come off so sharply in recent weeks is that global demand has been slumping but OPEC continues to report that oil production is on the rise.

Barakat says that part of the drop in demand has stemmed from the rapid rise in oil prices.

"The theme for the past week has been demand destruction and that may continue to be the driver in the first half of this week also," said Barakat.

"Some growth in OPEC supply and non-OPEC supply coupled with some sluggishness in global demand," said Lebow, "are major factors in the market coming off."

Even though demand has been decreasing on record high oil prices, geopolitical tensions that threaten supply channels still affect the market, Lebow said.

Retail gas prices. Prices at the pump have fallen for 11 days in a row after climbing to record high prices well above $4 a gallon.

The price of regular unleaded gasoline costs $3.958 a gallon on average, a daily survey by motorist motorist advocacy group AAA showed Monday.

A separate report Lundberg Survey, Inc. released Sunday showed that gas prices slipped 12 cents over the past two weeks to an average of $3.9959 a gallon.

The Department of Transportation released a study on Monday that said Americans drove 9.6 billion fewer miles in May compared to the same time last year, as a result of higher prices at the pump.

Meanwhile, a report the Energy Department released last week showed that U.S. gas demand had fallen 2.4% from the same period last year.  To top of page

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