Oil corrects lower as Fed-led rally runs out of steam UPDATE

Wed, Mar 19 2008, 10:24 GMT
http://www.afxnews.com

(Updates prices, adds details)

LONDON (Thomson Financial) - Oil corrected lower after rising sharply yesterday, as players awaited US inventory data expected to show further gains in crude stockpiles, and as the relief rally following yesterday's Fed rate cut ran out of steam.

The US Federal Reserve cut interest rates by 75 basis points yesterday in another bid to avert a full blown US recession. US equities surged in response, while oil prices recovered most of Monday's losses.

Even the dollar rallied following the Fed rate cut as markets took relief that the Fed is pulling out all the stops to protect the US economy. The US currency is giving back some of the gains today, however.

Meanwhile equities in Europe are trending lower as worries over the global credit squeeze and ongoing US economic turmoil resurface, sending oil lower in response.

"It is difficult to assess where energy markets are going next, but we continue to favour the downside. For all the support a surging US equity market provided commodities yesterday, let us not forget that we had a similar 400-point rise not too long ago, only for the advance to veer badly off course immediately afterwards," said MF Global analyst Ed Meir.

He added that it is difficult to see oil sustaining current lofty levels if the market is faced with another set of negative stock numbers from the US Energy Information Administration later today.

At 10.01 am, New York's WTI crude for April delivery, which expires later today, was down 83 cents at 108.66 usd per barrel, having risen 3.74 usd by the close yesterday, near Monday's record 111.80 usd.

In London, Brent crude for May delivery was down 90 cents at 104.66 usd per barrel.

Markets are awaiting stock data from the EIA, scheduled for release at 2.30 pm. The data is expected to show crude stocks rose by about 1.9 mln barrels in the week to March 14.

Although it is also expected to show a 550,000-barrel drop in gasoline stocks and a 1.7 mln-barrel fall in distillate supplies, markets will likely focus on the successive gains in US crude stockpiles.

The gains have driven many analysts to argue that the surge in oil prices this year is out of step with fundamentals, which show supplies are improving at the same time as demand is waning.

As a result, they say commodities are at risk of turning lower, even if for now they remain supported by a wall of fund money that is looking for better returns than equities in the current financial turmoil.

"There appeared little fundamental news in the marketplace and price are being driven by other economic forces that we have to respect," noted MF Global senior broker Robert Laughlin.

Elsewhere, players were monitoring the ongoing spat between US oil giant ExxonMobil and Venezuela. Yesterday, a UK court lifted a freeze on 12 bln usd of Venezuela's international assets granted to US oil giant ExxonMobil.

However, Venezuela's oil minister Rafael Ramirez upped the ante despite the victory, saying his country planned to 'quantify' damages related to Exxon's freeze on state assets and could 'countersue'.

He also suspended shipments of Venezuelan crude to the 185,000 bpd Chalmette, Louisiana refinery run by Exxon.

"The market has consistently viewed the ongoing dispute between Exxon Mobil and Venezuela as bullish, but we don't see it as all that disruptive, at least not yet. As long as Venezuela is still pumping the same volumes and looking to sell the barrel's somewhere, world crude supply remains the same," said Citigroup analyst Tim Evans.