Subdued US demand, strong dollar drive down oil prices

Oil pared gains yesterday as the dollar strengthened, with the market's attention turning to forecasts for steady US crude inventories after prices topped $75 (Dh275) earlier on optimism about the economy. The US dollar rose after Australia's central bank surprised markets by leaving its interest rates unchanged, sending the Australian dollar down.

March US crude was up 32 cents at $74.75 at 0540 GMT, after touching $75.44 earlier, a rebound of over $3 from last week's 2010 lows. London ICE Brent rose 22 cents to $73.33.

"The big gains were linked to expectations of recovery, but people are reassessing oil market fundamentals, looking to the next inventory report to derive some guidance," said David Moore, a commodity strategist with the Commonwealth Bank of Australia.

"We have a situation where demand in the US still seems quite subdued. We have seen a fairly marginal movement in the dollar, that might be having a negative impact on the oil price," Moore said.

US crude stockpiles probably slipped by 200,000 barrels in the week ended January 29 following disruptions at a Texas port, while inventories of distillates, including heating oil and diesel, may have declined by 900,000 barrels, a Reuters preliminary survey showed.

But gasoline stocks likely posted a larger gain of 1.3 million barrels, the poll showed. "Demand for oil isn't really improving," said Tetsu Emori, a fund manager at Tokyo-based Astmax. "We don't see any sign of real recovery. There is a huge amount of inventories in the physical markets." US crude for March delivery reached its highest intraday price since January 22 earlier after prices touched $75, triggering automatic buy orders.

"People are quite nervous around $75," Emori said. "There was short-covering after prices broke above that level. In the very short term, the market has been oversold, so some people see it as a good time to buy on dips below the $75-$80 range."

An industry report showed that the US manufacturing sector grew in January at a faster rate than expected.

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