Crude Falls on Strong Dollar but Support Is Firm

Source:

"Oil takes a breather after benchmark contracts jumped to fresh two-and-a-half year highs Monday."

Crude-oil futures were lower in Asia Tuesday, taking a breather after benchmark contracts jumped to fresh two-and-a-half year highs Monday, with the dollar's strength against major currencies capping oil price upside.

On the New York Mercantile Exchange, light, sweet crude futures for delivery in May traded at $108.15 a barrel at 0637 GMT, down $0.32 in the Globex electronic session. May Brent crude on London's ICE Futures exchange fell $0.14 to $120.92 a barrel.

Although investors continued to fret over possible further oil supply disruptions amid ongoing tensions in the Middle East and North Africa, some participants said crude's rally in the year to date looks overdone.

"No one can be confident exactly how the events in the Middle East will play out," said John Higgins at Capital Economics. "The worst fears of contagion to other major producers (from Algeria all the way to Saudi Arabia) have not been proved right. In time we expect the geopolitical risk premium in oil prices to fall away."

The U.S. dollar's strength against major currencies weighed on oil prices after U.S. Federal Reserve Chairman Ben Bernanke said the central bank would respond to any sustained rise in inflation, raising expectations of potential policy tightening in the U.S.

The Fed chief said he expects inflation to be "transitory," but added the central bank will watch the situation "extremely closely" and will respond if needed.

"The end of QE2 in the U.S. is looming," Higgins said, using the shorthand term for a second round of quantitative easing, a policy of low interest rates and other measures aimed at increasing market liquidity. "A less accommodative monetary stance from the Fed should remove one of the factors that has been undermining the dollar and supporting commodity prices, including oil."

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