Oil slips but remains supported by fund interest despite poor US outlook UPDATE

Mon, Mar 10 2008, 11:22 GMT
http://www.afxnews.com

(Updates prices, recasts headline, adds details)

LONDON (Thomson Financial) - Oil prices slipped, but remained within touching distance of last week's record highs as the recent influx of fund money kept the market well supported despite a deteriorating US economic outlook.

At 9.38 am, New York's WTI crude for April delivery was down 6 cents at 105.09 usd per barrel. On Friday, WTI hit an all-time high of 106.54 usd per barrel.

In London, Brent crude for April delivery was down 15 cents at 102.23 usd per barrel.

While US demand projections are weakening as the world's largest consumer of oil teeters on the brink of recession, crude markets have surged to a series of record highs above 100 usd in recent weeks.

Speculative buyers have poured into commodities in reaction to tumbling equity markets and US dollar weakness, with tangible assets seen as a safer bet by some financial players during the ongoing economic turmoil. But with US employment figures showing steep declines on Friday, and speculative investors keen to lock in profits, prices could be vulnerable to the downside.

"The disconnect between slowing US growth and a soaring commodity/energy complex has truly been quite remarkable," said MF Global analysts Ed Meir. Friday's surprisingly large drop in February non-farm payrolls was the latest evidence of a rapidly weakening US economy, as jobs retrenched by 63,000 on the month.

"These numbers hardly reversed the upward momentum we have been seeing in energy prices or in metals, but we think that as the US growth picture starts to deteriorate, it will displace the two driving forces behind the current commodity price surge, namely the weaker dollar and the massive fund flows going into the sector largely as a response to the lack of viable investment alternatives in the bond and stock markets.

"However, absent strong US growth, these two variables alone will have difficulty in sustaining the price advances we are seeing."

Prices were further boosted last week by OPEC's decision to hold production quotas steady, spooking a market that remains concerned about supply tightness given booming demand growth in developing countries such as China.

Geopolitical concerns have eased since last week however, helping to knock the top off record prices, as the stand-off between Colombia and regional crude producers Ecuador and Venezuela was resolved over the weekend. Tensions had been heightened in the region after Colombia targeted rebels of the Revolutionary Armed Forces of Colombia (FARC), killing commander Raul Reyes and other fighters sheltering over the border in Ecuador.

But at a regional summit this weekend, Colombian President Alvaro Uribe apologized and agreed to a statement with Ecuador's President Rafael Correa resolving the dispute, with Ecuador in turn agreeing to deal with armed groups which threaten regional stability.

d.sheppard@thomson.com

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