Oil Drops on Worries About Weaker Demand

Oil's sharp decline started last week. Crude futures started plunging after the U.S. Federal Reserve-backed sale of Bear Stearns Cos. to JPMorgan Chase & Co. created fears of deeper economic problems. Prices dropped around 10 percent during the shortened trading week from a trading record of US$111.80 hit last Monday.

"The collapse of Bear Stearns has caused investors to focus more on how a recession in the U.S. would cut oil demand," said Victor Shum, an energy analyst with Purvin & Gertz in Singapore. "Today we're seeing some pullback and some profit taking too."

Light, sweet crude for May delivery dropped US$1.71 to US$100.13 a barrel in Asian electronic trading on the New York Mercantile Exchange by midday in Singapore.

The contract on Thursday fell 70 cents to settle at US$101.84 a barrel. The market was closed for Good Friday.

Shum said oil's price swoon may not last for long.

"The U.S. economic troubles on the one hand would undermine oil prices ... but so long as the U.S. dollar remains weak, there will be support for oil prices as commodities like oil and gold as these are seen as a hedge against the falling dollar," Shum said.

"It's a tug of war, and oil pricing has not yet collapsed, it has simply pulled back," he said.

Most investors expect the Federal Reserve to cut interest rates several more times this year, moves that are sure to put new pressure on the dollar. Lower interest rates tend to weaken the greenback, driving investors to commodities such as oil that they view as a hedge against inflation. A lower dollar also makes oil less expensive to overseas investors a trend that reverses when the dollar strengthens.

Prices were pressured when the Labor Department said Thursday the number of people filing for unemployment benefits jumped by 22,000 last week, much more than expected. A sharp slowdown in the economy could reduce demand for oil and gasoline.