Oil falls despite Russia-Georgia conflict

August 11, 2008 8:23:59 AM PDT
Oil prices fell Monday as traders bet on continued weakness in the market despite concerns that a widening conflict between Russia and Georgia over the breakaway province of South Ossetia could disrupt supplies in the region.Light, sweet crude for September delivery slipped 27 cents to $115.20 a barrel in electronic trading on the New York Mercantile Exchange by afternoon in Europe. The contract fell $4.82 on Friday to settle at $115.20 a barrel.

"The market is watching what happens there closely," said Mark Pervan, senior commodity strategist at ANZ Bank in Melbourne. "It's not a major oil producer, but there are major transport links to Europe through that region."

Vienna's JBC Energy cited the Azeri company SOCAR as saying shipments from the two Georgian ports, Batumi and Kulevi, had ceased during the weekend, adding that "the company could declare force majeure on its exports from the two ports." Force majeure frees oil companies from liabilities if a catastrophe or other major event it cannot control stops them from meeting their obligations.

U.S. President George W. Bush on Monday sharply criticized Moscow's harsh military crackdown in the former Soviet republic of Georgia, saying the violence is unacceptable and Russia's response is disproportionate.

On Sunday, Vice President Dick Cheney told Georgia's pro-American president, Mikhail Saakashvili, that "Russian aggression must not go unanswered, and that its continuation would have serious consequences for its relations with the United States," Cheney's office reported.

While Georgia said its troops have retreated from South Ossetia province and are honoring a cease-fire, Russia disputed the claim, and U.S. officials said Moscow was expanding its blitz into new areas.

The province broke away from Georgian control in 1992. Georgia, whose troops have been trained by American soldiers, began an offensive to regain control over South Ossetia last week, launching heavy rocket and artillery fire and air strikes that pounded the regional capital Tskhinvali. Georgia says it was responding to attacks by separatists.

In response, Russia launched massive artillery shelling and air attacks on Georgian troops. Russia has granted passports to most of the region's residents, and separatist leaders there have sought to have the province absorbed back into Russia.

A Russian official has said more than 2,000 people have been killed in South Ossetia since Friday; the figure could not be confirmed independently.

In London, Brent crude for September delivery rose 47 cents to $113.80 a barrel.

Nymex crude is down about $30 from its high of $147.27 on July 11, and many investors see the drop-off in prices as a buying opportunity.

"Losses have been pretty sharp in the last few weeks and there's always someone looking to buy on the dip," Pervan said.

A stronger dollar also contributed to bearish sentiment. The euro fell to $1.4975 against the dollar in Asian currency trade, while the dollar is holding near 110 yen. A weak dollar helped to boost oil prices earlier this year, because dollar-denominated commodities are often used as hedges against inflation and a falling U.S. currency. Gains in the currency tend to reverse that trend.

In other Nymex trading, heating oil futures rose by less then a penny to $3.1353 a gallon (3.8 liters), while gasoline prices gained lost marginally to fetch $2.8802 a gallon. Natural gas futures rose by more than 6 cents to $8.312 per 1,000 cubic feet.


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