Oil price falls further to $118

Oil prices touched three-month lows of $118 a barrel on Tuesday as traders reacted to news of rising supplies.

US crude fell as low as $118 a barrel, before recovering to $119.13. Brent crude fell by $2.20 to $118.

Prices extended Monday’s declines after it appeared that storms in the Gulf of Mexico were unlikely to lower output.

The news added to the view that slowing economic growth is taking its toll on commodity markets as it coincided with a drop in metal and food prices.

In recent days, precious metals and food prices have drifted lower amid the belief that the global slowdown is hurting demand.

Demand drop

On Monday platinum hit six-month lows as falling car production hit demand for emission control devices, its largest market.

Meanwhile, rubber – the main raw material for tyres – hit two-month lows.

Copper, lead and zinc – all used in the industrial sector – have suffered losses in recent days with many blaming falling demand from the previously red-hot Chinese economy.

“You’ve got an economic slowdown and markets are slowly coming to terms with it,” said Mark Konyn, chief executive of Allianz SE’s RCM Asia Pacific arm.

“Some of the speculation that was looking for safe harbour in commodities is starting to unwind.”

Stockpiles growing

Experts added that rising stockpiles have also pointed to falling demand for commodities, making them a less attractive prospect.

For example US soybean futures hit their lowest level in three months as supplies were boosted by good weather and a slowdown in Chinese buying ahead of the Beijing Olympics.

A Reuters survey also found that supplies from oil producer group Opec had risen for the third month in a row in July.

The increase in Opec supply was mainly due to Saudi Arabia raising its oil output.

Weak US consumer spending figures released on Monday also increased expectations that demand for fuel in the US could drop.

Analysts said that many investors were now focusing more on the potential imbalances between supply and demand on the oil market, and were looking at moving cash from oil and putting it in other assets.

“Most of the hedge funds have been taking profits,” said Angus McPhail of British-based investment firm Alliance Trust.

He added that prices could fall to “about $100 within the next month if you keep on getting weak demand data”.