Oil prices drop below $112 on strengthening US dollar

As the greenback has recovered this week against the euro and yen, the front-month crude futures contract on the New York Mercantile Exchange (Nymex)has dropped $8 from its high to oil's lowest level since April 14.Â

 

The dollar's rise has stripped away some of oil's appeal to investors who have been betting that the greenback would continue to falter. When the dollar gains ground, commodities such as oil lose their value as a hedge against inflation, prompting selling. Also, a stronger dollar makes oil more expensive to investors overseas.

 

Light, sweet crude for June delivery fell 61 cents to $111.91 a barrel in electronic trading on the Nymex by midmorning in Singapore. The contract fell 94 cents to settle at $112.52 a barrel on Thursday.

 

The end of a strike that had cut production at an Exxon Mobil Corp. facility in Nigeria, a major U.S. oil supplier, also gave market participants a reason to sell on Thursday. Oil prices jumped last week and early this week on word of the strike, as well as on a separate labor action in Scotland.

 

The Scotland action, which ended Tuesday, caused the shutdown of a 700,000-barrel-a-day pipeline system that carries about a third of the Britain's North Sea crude.

 

Analysts caution, though, that oil's swoon could be temporary. The dollar's protracted decline has been a major factor behind oil's rise from about $64 a barrel a year ago, and future dollar weakness could easily push crude futures above $120, they say.

 

The dollar's recent gains have come on a view that the U.S. Federal Reserve is done cutting interest rates; lower interest rates tend to weaken the dollar. The Fed cut its key rate a quarter percentage point on Wednesday, without giving a clear indication of its future plans. With the benchmark federal funds rate at 2 percent, however, investors sense that the Fed can't cut rates much further.

 

In other Nymex trading, heating oil futures lost 0.82 cent to $3.1095 a gallon while gasoline prices dropped 1 cent to $2.8682 a gallon. Natural gas futures fell 5.1 cents to $10.51 per 1,000 cubic feet.

 

Brent crude futures lost 50 cents to $110 a barrel on the ICE Futures exchange in London