Oil slides below $68 as investors eye inflation

June 2, 2009 5:04:41 AM PDT
Oil prices slipped below $68 a barrel Tuesday as traders took profits on recent gains, which were driven by speculation that a massive global fiscal stimulus could spark an economic recovery and inflation. Benchmark crude for July delivery was down 82 cents to $67.76 a barrel by noon in European electronic trading on the New York Mercantile Exchange. On Monday, the contract rose $2.27 to settle at $68.58, the highest close since early November.

Investors have been buying commodities, traditionally seen as a hedge against inflation, on worries that this year's huge fiscal and monetary easing around the world could eventually send prices soaring.

"There's a lot of concern about inflation, even talk about hyper-inflation down the road," said Christoffer Moltke-Leth, head of sale trading for Saxo Capital Markets in Singapore. "Oil right now is a freight train barreling upward."

Traders have also been investing in oil on signs the worst of a severe recession in the U.S. is over, and that growth may be picking up in China.

"It looks like the market expects the turnaround is just around the corner," Moltke-Leth said. "But the economy is still deteriorating, just less than before."

Trader and analyst Stephen Schork also said optimism that the economy could soon turn the corner has been boosting prices.

Oil and related products "got a lift by the latest batch of bullishly construed economic headlines, i.e. positive industrial production growth in China and a smaller than expected contraction (less bad is good) in U.S. manufacturing," he wrote in his Schork Report.

Investors will be watching for the weekly petroleum inventory data from the Energy Department's Energy Information Administration on Wednesday for signs crude demand may be growing.

Analysts expect a fall of 2 million barrels, according to a survey by Platts, the energy information arm of McGraw-Hill Cos. Stocks dropped last week for a third straight week after rising for the previous 10 weeks.

In other Nymex trading, gasoline for June delivery was down by more than a cent at $1.92 a gallon and heating oil fell nearly 2 cents to $1.75 a gallon. Natural gas for June delivery slid 7 cents to $4.18 per 1,000 cubic feet.

In London, Brent prices were down 50 cents to $67.47 a barrel on the ICE Futures exchange.

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Associated Press Writer Alex Kenndedy contributed to this report from Singapore.

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