Tuesday, August 5, 2008

Oil Prices to Drop Near $124 on Weak U.S. Economic Data

On Monday, Oil prices dropped near $124 a barrel as more signs of a slowing U.S. economy outweighed concerns over Iran and a tropical storm forming in the Gulf of Mexico.

Oil prices began the day lower after another dose of disappointing data fed investors' beliefs that a U.S. economic slowdown is forcing Americans to cut back on energy use. Consumer spending fell in June as shoppers dealt with higher prices for gasoline, food and other items. At the pump, retail gas prices kept dropping; it reflected the continuing price-driven drop in U.S. fuel demand. A gallon of regular gas fell on average about half a penny overnight to $3.881. Gas has fallen 5.6 percent since hitting an-all time high above $4 a gallon on July 17.

Light, sweet crude for September delivery fell 77 cents to $124.33 a barrel in morning trading on the New York Mercantile Exchange. Earlier prices alternated between gains and losses as investors digested the spending data. Adusted for inflation, consumer spending fell by 0.2 percent in June, the worst showing since February. Rising costs for gasoline-helped push an inflation measurement linked to consumer spending up by 0.8 percent in June, the biggest leap in almost three decades.

According to Jim Ritterbusch, president of energy consultancy Ritterbusch and Associates in Galena, Ill, the oil market's focus right now is on any weakness that signals a slowdown in the economy. On the other hand, escalating tensions between the West and Iran kept prices from falling further. Moreover, the five permanent members of the U.N. Security Council and Germany have agreed to pursue further sanctions against Iran over its nuclear program after it failed to meet a weekend deadline to respond to an incentives package.

Iranian President Mahmoud Ahmadinejad said that diplomacy is the only way out of his country's standoff with the West as the informal deadline expired. The comments was made a day after asserting that his country would not give up its "nuclear rights," signaling that it would refuse demands to stop enriching uranium or at least not to expand its enrichment work. Meanwhile, the United States and its European allies fear Iran intends to use the technology to develop material for nuclear weapons under the cloak of a civilian nuclear power program. Iran denies the accusation.

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