Oil fell as economic fears overshadowed Saudi Arabia’s production cuts

LONDON, June 6, 2010 (FBC) Oil prices fell more than a dollar a barrel, retreating from a strong rally in the previous session, after Saudi Arabia vowed to further increase production cuts.

Brent crude futures were down $1.30, or 1.69 percent, at $75.41 at 1327 GMT. U.S. West Texas Intermediate crude was down $1.39, or 1.93 percent, at $70.76.

Brent gained as much as $2.60 a barrel on Monday and WTI gained as much as $3.30 after Saudi Arabia’s output fell by 1 million barrels per day (bpd) at the end of the week to 9 million bpd in July.

But weaker demand, tighter non-OPEC supply, slower economic growth in China and the recession in the US and Europe mean Saudi Arabia’s cuts are unlikely to achieve a “sustainable price increase” to the high 80s and low 90s for the dollar, Citi analysts said. In a note on Tuesday.

Brent crude oil futures – where the current price is higher than in recent months – retreated after the weekend announcement, with the six-month spread hitting a five-week high of $2.20 a barrel on Monday.

It fell to $2.06 a barrel on Tuesday.

“The market is focused on demand concerns, with recessionary concerns weighed on a broad-based loss in the US services PMI, giving room for the Fed to pause rates,” said Ole Hansen, head of commodity strategy at Saxo Bank.

The U.S. services sector rose in May as new orders slowed and market participants waited to see if the U.S. Federal Reserve would raise or hold interest rates in June.

Higher interest rates may suppress energy demand.

Sentiment was further dampened by data that German industrial orders unexpectedly fell in April.

“If upcoming economic data shows persistent inflationary pressure and investors bet on further interest rate hikes, demand forecasts could be revised downward, effectively eliminating the impact of the recent (OPEC+) output decision,” said Tamas Varga at brokerage PVM.

The U.S. Energy Information Administration (EIA) is set to release its short-term energy outlook on Tuesday afternoon before China’s May trade data on Wednesday presents fresh demand indications for the world’s second-largest oil consumer.

(Reporting by Rowena Edwards in London) Additional reporting by Arati Somasekar in Houston and Trizi Yap in Singapore Editing by Sriraj Kalvilla and David Goodman

Our Standards: The Thomson Reuters Trust Principles.