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Crude down 20% from record

Unexpected rise in inventory helps drive drop

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Bloomberg News / August 7, 2008

DALLAS - Crude oil futures fell as low as $117.11 a barrel on speculation a slowing global economy will reduce demand, and after the dollar hit a seven-week high.

Yesterday's 1.7 percent drop to the intraday low put prices more than 20 percent below the record $147.27 a barrel in New York on July 11; a drop of 20 percent is a threshold often seen as the start of a bear market.

Oil's decline follows a one-year doubling of prices as the dollar weakened, demand in Asia grew, and Iran's nuclear program spurred concern that the country, the Middle-East's second-biggest oil producer, might face a military attack from Israel.

"We've been warning about the oil bubble bursting after reaching $150 because of investors pulling money out of the markets and the negative demand reaction," said Eugen Weinberg, an analyst at Commerzbank AG in Frankfurt. "At the moment we expect a corrective move to continue."

Crude oil for September delivery fell 59 cents, or 0.5 percent, to $118.58 yesterday on the New York Mercantile Exchange, the lowest close since May 2.

Futures fell after a US government report showed an unexpected increase in inventories and an extended decline in fuel demand. Crude supplies rose 1.61 million barrels to 296.9 million barrels in the week ended Friday, the Energy Department said yesterday.

"The market focus is shifting back toward the direct oil fundamentals, such as how's demand, where's supply, and where are inventories, and away from some of the wider issues like what's the Federal Reserve Board doing with interest rates," said Tim Evans, an energy analyst with Citi Futures Perspective in New York.

Brent crude for September settlement fell 70 cents, or 0.6 percent, to $117 a barrel on London's ICE Futures Europe exchange. Earlier, it touched $115.60 a barrel, 22 percent below its own record high of $147.50.

"I'm not sure 20 percent is a meaningful benchmark, because the rise has been so steep and so quick," said Antoine Halff, a researcher at Newedge USA LLC. "We're not falling from established levels, but from a brief spike. This is not the same as falling from a plateau where we've been for months."

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