Oil falls on fears of growing demand collapse

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Brent crude futures dipped on Thursday after five days of gains, slipping under $122 a barrel on concern that strong prices will crimp demand and as central banks show signs of worry about inflation.

Brent crude shed 31 cents to $121,99 a barrel at 0814 GMT. It hit a 2-1/2-year high above $123 on Wednesday as violence in the Middle East propelled prices higher.

US crude futures gave up 2 cents to $108,81 a barrel, after touching $109,15 on Wednesday, their highest level since September 2008.

Focus is on the European Central Bank as it meets later, with analysts polled by Reuters expecting an increase in interest rates of 25 basis points from the record low of 1,0%.

“At current crude oil prices, the risk is turning more and more to the amount of potential demand destruction,” Petromatrix’s Olivier Jakob said.

Oil prices slipped even after rebels said Muammar Gadaffi damaged a pipeline connecting oilfields to the port town of Marsa el Hariga, with analysts noting the supply disruptions may have already been priced in.

Euro zone debt worries and inflation were high in the agenda after Portugal asked for a EU bailout overnight, while potentially higher euro zone interest rates will hike the cost of debt for already highly indebted economies.

In Asia, China’s central bank already lifted interest rates this week for the fourth time since October, as it ramps up the battle against inflation.

The stronger crude future prices have pushed prices at the pump globally, further exacerbating the inflationary pressure governments face from the rising cost of food and raw materials.

“Current price levels should have a negative impact on demand,” said Tetsu Emori, a Tokyo-based commodities fund manager at Astmax Investments.

The International Energy Agency said on Wednesday that the current oil price is harming global economic growth and is a mounting concern for consuming nations.

Saudi Arabia and the United Arab Emirates have raised output to compensate for supply loss from Libya but there has been no coordinated supply policy response from OPEC to rein in high prices.

“The nature of this lack of response and general
drift of recent policy statements suggests that producers are a long way from seeking actively to bridle in the upside for prices, leaving the door to $130 Brent swinging open,” analysts at Barclays Capital led by Paul Horsnell said in a note.

On the data front, US weekly jobless claims are expected to have dipped to 385 000 in the week ended April 2.

The recent decline in filings for unemployment benefits has coincided with faster job growth.

On Wednesday, weekly US government data showed that gasoline demand at the world’s top oil consumer fell 1,2% from year-ago levels as prices at the pump neared $3,7 a gallon.

Gasoline demand should pick up as the driving season begins in the United States, but high prices would temper growth in consumption.

“(US) demand will be challenged as higher retail prices and little wage growth lead to a rising burden of gasoline spending in US households’ budget and disposable income,” Harry Tchilinguirian, head of commodity markets strategy at BNP Paribas, said in an overnight note.