Oil drops back to US$97

You probably won't see a change at the gas station this weekend. But relief will come soon because oil prices fell 15 per cent this week, the steepest decline in two and a half years.

Oil hit a two-year high of US$114.83 in last Monday's trading. It closed Friday at US$97.18.

The plunge was part of a sharp sell-off across in commodities this week. Analysts say investors - demonised as "speculators" by some market watchers - got nervous that oil, metals and grains had risen over the past few months to unrealistic heights.

Their rush to sell knocked silver prices down 28 per cent, sugar down 13 per cent and natural gas down 10 per cent.

While analysts cited reasons specific to each commodity, they had one common explanation for the pullback: The strengthening US dollar.

Commodities such as oil and silver are bought and sold in dollars. When the dollar is weak, those commodities look cheaper to holders of foreign currency so they buy.

Conversely, when the dollar rises, commodities look more expensive. So they sell.

Speculators, knowing this, tend to sell commodities and buy dollars if they anticipate the dollar will rise. That amplified this week's retreat in prices.

"This move wasn't about supply issues," said Rich Ilczyszyn, senior market strategist at Lind-Waldcock, a Chicago futures brokerage firm. "It was people hedging and people investing."

An index of the dollar compared with a basket of foreign currencies rose two per cent for the week.

Government bond-buying

Commodity prices began to rise late last August. That's when the US Federal Reserve signalled its intention to embark on what eventually became a US$600-billion government bond-buying designed to push down interest rates, boost stock prices and jolt the economy.

But the dollar fell as a result. Investors knew the Fed would be flooding financial markets with US currency.

Many of those dollars poured into commodities, pushing them even higher.

Other factors, such as concern about Middle East oil supplies and China's demand for raw materials, contributed to the momentum in commodities buying. Analysts warned it was overdone.

When the dollar rose this week - and reports suggested demand for commodities was weakening in the US - that was a tipping point for many investors.

Still, traders say this week's sell-off is very likely just a pause in a long-term upward trend for commodity prices. While prices could fall in the near-term, a stronger US economy and rapidly growing economies of Asia will continue to need food, energy and raw materials.

Before Friday, the price of gasolene had increased everyday since March 23.

Andrew Lipow, president of Lipow Oil Associates in Houston, said problems with US refineries have been resolved and gasolene supplies should start to grow this summer as refineries get back into gear.

"Combine those extra supplies with still rather high gas prices, and you're going to see continued pressure on gas prices throughout the summer" to fall, he said.

Benchmark West Texas Inter-mediate for June delivery fell US$2.62 to US$97.18 per barrel on the New York Mercantile Exchange. In London, Brent crude dropped US$1.67 at US$109.13 per barrel on the ICE Futures exchange.

In other Nymex trading for June contracts, heating oil fell 4.12 cents at US$2.8457 per gallon and gasolene futures dipped 0.53 cent to US$3.0901 per gallon. Natural gas dropped 3.4 cents to US$4.297 per 1,000 cubic feet.

- AP