Oil prices drop below $127 a barrel on worries about demand

Oil dropped below $127 a barrel Monday in Asia on worries that prices are cutting into demand and as a probe into futures trading by a US regulator continued to weigh on the market.

Jitters about record high fuel and energy prices - particularly in the US, which has just started its summer driving season - have helped to pull oil off the $135.09 a barrel trading record hit May 22. Data from the US Energy Department and Federal Highway Administration and several surveys in recent days suggest American consumers are driving less.

Additional selling pressure came with last week’s announcement from the Commodity Futures Trading Commission about an investigation into possible price manipulation in oil futures markets. The CFTC also announced new rules designed to increase transparency of US and international energy futures markets.

“There are more concerns on the high pricing we have seen, that it will have a negative impact on demand, and the fact that the CFTC is expanding its investigation of manipulation in the oil markets,” said Victor Shum, an energy analyst with Purvin & Gertz in Singapore.

Late afternoon in Singapore, light, sweet crude for July delivery was down 80 cents at $126.55 a barrel in electronic trading on the New York Mercantile Exchange. On Friday, the contract settled at $127.35 a barrel, up 73 cents.

At one point Friday, July crude futures dipped below $125 a barrel before rebounding.

“The seesaw we’ve seen in the last few days is an indication that the oil market may have peaked,” Shum said.

“Having said that ... the reality is that even though we have crude off the peak of $135 there are still supply-side issues going forward,” he said. “The hurricane season is certainly one factor to contend with.”

Tropical Storm Arthur formed Saturday afternoon - one day before the official start of the 2008 Atlantic Hurricane season - and though it caused the temporary closure of two of Mexico’s oil export ports, according to Dow Jones Newswires, it wasn’t expected to cause any severe disruptions to oil shipments.