Oil slides to new 7-week low on demand worries

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Thu, Jul 24 10:32 PM

By Ikuko Kao and Peter Graff

LONDON, July 24 (Reuters) - Oil prices slipped to a new seven-week low on Thursday on mounting evidence that high prices and economic weakness have slowed demand in the world's top consumer the United States.

Oil has fallen by more than $23 a barrel from its record high of $147.27 on July 11, marking the biggest fall in dollar terms since futures began trading in New York in 1983. In percentage terms, the 15 percent decline is the steepest pull-back since early 2007.

U.S. light crude erased modest earlier gains to fall to a session low of $123.50 a barrel, the lowest level since early June. At 1545 GMT the contract was down 18 cents to $124.26 a barrel.

London Brent crude ticked down 8 cents to $125.21, after falling to a seven-week low of $124.10.

U.S. crude dropped by about $4 on Wednesday after U.S. government data showed a larger-than-expected increase in gasoline stocks, together with weak implied demand. U.S. crude stocks dropped after a sharp decline in imports.

One potentially bullish factor was the threat from a militant group to sabotage oil facilities in exporter Nigeria, but analysts said the market was reacting to existing fundamentals, rather than the prospect of future disruption.

"Warnings like this normally would spook the markets into pushing higher," said MF Global in a research note.

"We can only suggest that the market, finally weighed down by the spectre of decreasing energy demand, may not be as responsive to geopolitical headlines as it once was."

The main militant group in Nigeria's oil-producing Niger Delta said on Wednesday it would attack major oil pipelines in the next 30 days to prove it had not received payment from the government to end its campaign.

Part of the reason for the record run-up in oil prices this year has been weakness of the U.S. dollar, which encouraged some investors to buy oil and other dollar-denominated commodities as a hedge against inflation and falls in other asset classes.

Analysts said the falls in oil since the middle of this month and in other commodity markets had coincided with some traders unwinding short-dollar/long-oil positions, which helped to lift the U.S. currency to a one-month high against the yen.

Even after the recent price fall, the oil price has still rallied by almost 30 percent in 2008 and is up from just $20 in 2002 on demand from growing economies like China. Producers have expressed confidence that strong demand will continue.

"Global demand is heading for an increase and there is no fear that demand will weaken over the coming five years," Mousa Marafie, a member of the Supreme Petroleum Council in OPEC nation Kuwait, told the state news agency KUNA.

"The current decline in prices is in the end a temporary decline," he said.

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