Kuwaiti explosion not enough to stop oil decline
By PABLO GORONDI Associated Press Writer

Oil prices fell closer to $122 a barrel Thursday as investors become more wary of falling global demand and a strengthening dollar, despite an explosion at a Kuwaiti petrochemical plant.

By early afternoon in Europe, light, sweet crude for July delivery fell 10 cents to $122.20 per barrel in electronic trade on the New York Mercantile Exchange. The contract had risen rose as high as $123.25 earlier in the session.

On Wednesday, it fell $2.01 during the floor session to close at $122.30, its lowest settlement since May 6. Changing expectations over global demand were seen as the main cause for the drop.

In London, July Brent crude futures were up 24 cents to $122.34 a barrel on the ICE Futures exchange.

Earlier Thursday, both the Nymex and Brent futures contracts briefly rose above $123 a barrel after initial reports of a blast at the Mina Abdalla industrial area, but retreated when it emerged that the explosion had not affected Kuwait National Petroleum Corp.'s refinery there, according to Dow Jones Newswires.

In its weekly inventory report released Wednesday, the U.S. Energy Department's Energy Information Administration said U.S. demand for gasoline dipped 1.4 percent over the last four weeks. Meanwhile, gasoline inventories rose by 2.9 million barrels last week, more than three times the increase analysts polled by energy research firm Platts had expected.

That has helped pull oil down nearly 10 percent from its May 22 high of $135.09. Also, India and Malaysia cut fuel subsidies, effectively raising their retail prices for everything from gasoline to cooking gas. Many investors believe subsidy cuts will choke off demand for fuel in the developing world.

"There's definitively smaller demand, (and) you have subsidies that are going to fall in energy consuming nations," said James Cordier, president of Tampa, Florida-based trading firms Liberty Trading Group and OptionSellers.com. "The psychology is just changing."

Indonesia and Taiwan, among others, have taken similar steps in recent weeks.

The EIA said inventories of distillates, which include diesel and heating oil, rose by 2.3 million barrels. Investors shrugged off an unexpected decrease in crude oil inventories.

Many analysts have questioned whether high oil prices can be sustained; many blame speculative investing fueled by the falling dollar for the near doubling of crude prices over the past year.

A weakening dollar can spur investors to buy oil and other commodities as a hedge against inflation, but the effect tends to reverse when the dollar strengthens. A stronger dollar also makes oil more expensive to buyers dealing in other currencies.

Recently, with some fluctuations, the dollar has been gaining against the euro and yen as U.S. economic data supports the view that the Federal Reserve isn't likely to cut its key interest rate further.

The euro fell to $1.5386, from $1.5446 late Wednesday in New York.

Among other main factors cited for sustained high prices over the past year is the unexpected declines in production from some of the world's key exporters, particularly Russia, Venezuela and Mexico.

In other Nymex trading, heating oil futures rose 2.33 cents to $3.5691 a gallon while gasoline prices rose 0.49 cent to $3.20 a gallon. Natural gas futures rose 6.4 cents to $12.443 per 1,000 cubic feet.

The July natural gas futures rose 15.8 cents to settle at $12.379 on Wednesday, again boosted by forecasts for hot temperatures in parts of the U.S. this weekend. That would boost demand from utilities for electricity generation to cool homes and businesses.