Oil declines as investors flock to dollar

US crude slipped by $2 to below $100 a barrel today as investors flocked to the dollar on renewed concerns over the euro zone debt crisis.

"The dollar is definitely the driving factor as the market is looking for new direction following the sharp correction earlier this month," said David Cohen, director of Asian Economic Forecasting at Action Economics in Singapore.

US crude futures for July fell $1.72 to $98.36 by 0634 GMT, while Brent crude for July was down $1.65 to $110.74 a barrel. Both benchmarks had dropped by over $2 earlier.

The dollar index, measuring the greenback against a basket of currencies, hit a seven-week high, making dollar-denominated crude more expensive for consumers using other currencies.

On Friday, Fitch Ratings cut Greece's debt ratings by three notches, pushing the country deeper into junk, while Standard and Poor's cut its outlook for Italy to "negative" from "stable" on Saturday, in a sign that the continent's problems were escalating rapidly.

Oil prices were also hit by expectations of lower oil demand from Europe as a volcanic eruption threatens air travel disruption.

Ash from a massive plume of smoke from an eruption of Iceland's most active volcano could spread south to parts of Europe next week, but experts yesterday still hoped the impact on air travel would be limited.

Brent is expected to rise towards $118 per barrel, while US crude remains neutral within a range of $95.26-$100.99 per barrel, but is biased to rise to $104.60, says Reuters market analyst Wang Tao.

Strong demand from China and a weakening dollar - down about 4 per cent so far this year - are expected to support oil prices in the longer term, analysts said.

China is bracing for its worst power shortage since 2004, which has led to it clamping down on diesel shipments.

"With the oil market already in deficit, incrementally higher Chinese demand over the summer could create an extra layer of strength," said Barclays Capital in a research note.

Analysts also expect the greenback to come under pressure again as US interest rates continue to remain low compared to those in other countries.

"Assuming the Europeans can get their act together, and US interest rates stay below those in other economies, the dollar should weaken, and that will be supportive of oil prices," said Mr Cohen.

Persistent tensions in the Middle East and worries about the possibility of further supply disruptions continue to keep a floor under oil prices, analysts said.

Tunisian foreign minister Mouldi Kefi said today he believed Libyan oil minister Shokri Ghanem was no longer working for the Gaddafi regime, contradicting earlier claims by the government in Tripoli that he was on an official trip to Tunisia, Europe and Egypt.

Yemeni president Ali Abdullah Saleh refused to sign an agreement yesterday to step down, the third time such a deal has fallen through at the last minute, despite pressure from Gulf Arab and Western mediators.

Uncertainty over pan-Arab protests and Libya's conflict pushed Brent to a 32-month peak last month, before a sharp correction in early May resulted in prices registering their largest ever weekly decline of more than $16 a barrel.

But an expected increase in output from Iraq later this year could help mitigate any loss in supply due to the geopolitical tensions.

Reuters