Oil below $79 on mixed signs for US recovery

Oil prices fell below $79 a barrel Wednesday amid mixed signals about the strength of the U.S. economic recovery and the dollar’s gains against other major currencies.

By midday in Europe, benchmark crude for December delivery was down 66 cents to $78.89 a barrel in electronic trading on the New York Mercantile Exchange. The contract rose 87 cents to settle at $79.55 on Tuesday.

Oil has retreated from a one-year high of $82 a barrel hit last week as investors look for signs of a sustainable U.S. economy to justify further crude price gains.

JBC Energy in Vienna called the recent rise of commodity prices “astonishing,” saying it was partly the result of the excessive money supply — created by the economic stimulus packages and central bank policies around the world — seeking protection against inflation and dollar weakness.

“Currently the market is mainly driven by sentiment and expectations, although these may be overly optimistic,” JBC said in a report. “Large U.S. dollar holders such as China are seeking dollar denominated investments, such as oil, to hedge their reserves today and secure their energy needs tomorrow.”

On Tuesday, the Conference Board said its Consumer Confidence Index fell unexpectedly in October to its second-lowest reading since May while the Standard & Poor’s/Case-Shiller home price index gained the third straight month in August.

U.S. oil inventories dropped last week, a sign crude demand may be rebounding. The American Petroleum Institute said late Tuesday that crude stocks fell 3.5 million barrels while analysts had expected a rise of 900,000 barrels, according to a survey by Platts, the energy information arm of McGraw-Hill Cos.

The Energy Information Administration is scheduled to release its supply data later Wednesday.

Crude investors have been encouraged by a rally in global stock markets since March.

“As long as the equities markets stay stable and the perception is out there that the global economy will grow, then the price of oil should go up,” Seattle-based Sander Capital Advisors said in a report.

Also affecting oil prices were the movements of the U.S. dollar, which tends to push oil prices lower when it strengthens.

On Wednesday, the euro fell to US$1.4789 from US$1.4809 late Tuesday in New York, while the British pound fell to US$1.6327 from US$1.6386.

“The risk (or) reward of trading the direction of oil independently of the exogenous markets when the correlations are so high remains very poor,” said Olivier Jakob of Petromatrix in Switzerland. “Trading oil without a tick by tick look at equities and the dollar should continue to be avoided.”

In other Nymex trading, heating oil fell 1.38 cents to $2.0413 a gallon. Gasoline for November delivery dropped 1.87 cents to $2.0518 a gallon. Natural gas for November delivery rose 0.3 cent to $4.560 per 1,000 cubic feet.

In London, Brent crude for December delivery fell 59 cents to $77.33 on the ICE Futures exchange.