Oil Prices Swing Downward

$4 Fall Comes as Dollar Gains Strength, U.S. Demand Drops

Oil prices fell more than $5 a barrel in midday trading yesterday before settling nearly $4 lower, buffeted by a rise in the dollar, slowing economic activity in Europe and the prospect of new violence in the Middle East.

Crude futures on the New York Mercantile Exchange dipped $5.32 by midday, then climbed back up to settle at $141.37, down $3.92 or 2.7 percent, for the day. The record price, $145.85, was set on July 3.

On a roller-coaster day, stocks tumbled before regaining some ground. The Dow Jones industrial average closed down 56.58 points, or 0.5 percent, to 11,231.96. The tech-heavy Nasdaq fell 2.06, or 0.09 percent, to 2243.32, while Standard & Poor's 500-stock index dropped 10.59, or 0.84 percent, to close at 1252.31.

Shares of the mortgage-finance firms Freddie Mac and Fannie Mae plummeted almost 20 percent each after a report by Lehman Brothers said the two companies may have to raise tens of billions of dollars more in capital to comply with a change in accounting rules. Financial markets sank in response.

Analysts attributed the swing in stock and oil markets to a variety of factors. Oil was affected by a series of developments in the confrontation over Iran's nuclear program, including tough talk from President Mahmoud Ahmadinejad in the face of international pressure.

"I think there was sort of a feeling that things had come off the boil a bit as they came into trading this morning, but again, the Iranian factors obviously haven't changed all that much, and the worry still remains," said John Kilduff, an energy analyst at MF Global. "On a trader's mind, it's still a real possibility that an attack can occur."

Oil prices also were hurt by the strengthening of the dollar -- because oil is priced in dollars, its price often decreases to compensate for a rise in the dollar's value -- and the possibility that the United States would tap its strategic petroleum reserves.

"The market right now is concerned about whether the government will or won't use their strategic petroleum reserve as a last policy option," said Larry Goldstein, former president of the Petroleum Industry Research Foundation and currently a director with the Energy Policy Research Foundation. "The market is very nervous and could move in either direction, and when it moves, it doesn't move by pennies, nickels and dimes now, it moves by dollars."

Adam Sieminski, chief energy analyst at Deutsche Bank, attributed the drop in oil prices primarily to a falloff in U.S. demand. A July 4 report by the bank predicted a 2 percent drop in U.S. oil demand in 2008 and an additional 0.5 percent drop in 2009. Demand in April ran 700,000 to 800,000 barrels a day below the figures for April last year, and the trend appeared to continue into May and June, Sieminski said.

"That's big stuff," he said. Sieminski said that the response of the oil market to changing demand has been overdue but that yesterday it "finally showed up, with a vengeance. . . . Maybe we're finally starting to see demand slipping enough to make a difference to the global markets."