Oil hovers near $89 amid signs of weak US demand

By PABLO GORONDI | September 15, 2011 | 8:25 AM EDT

Oil prices hovered near $89 a barrel Thursday, supported by a weaker dollar and rising stock markets in Europe even with signs of sluggish U.S. consumer demand.

By early afternoon in Europe, benchmark oil for October delivery was up 47 cents to $89.38 in electronic trading on the New York Mercantile Exchange. Crude fell $1.30 to settle at $88.91 on Wednesday.

In London, Brent crude for November delivery was up $1.96 at $111.61 on the ICE Futures exchange.

Key European stock markets were up by around 2 percent and the euro rose to $1.3810 from $1.3752 as markets seemed more optimistic about Greece's ability to avoid default.

A weaker dollar makes crude cheaper for investors holding other currencies and usually leads to higher prices.

"We still expect crude oil prices to work lower over the near-term, but the decline will be punctuated by rather sharp rallies that could come our way if and when markets get a sense that the situation in Europe is stabilizing," said senior commodity analyst Edward Meir at MF Global in New York. "No doubt, some measures will eventually be announced, allowing markets to breathe a sigh of relief, but we think these will prove to be only temporary fixes."

The bullish factors in Europe were contrasted with clear signs that demand for crude in the United States is slipping.

While U.S. crude oil inventories fell more than twice what analysts expected last week due to the disruptions caused by Tropical Storm Lee, gasoline supplies grew and demand for gasoline over the four weeks ending Sept. 9 was 2.7 percent lower on the year.

The Commerce Department said Wednesday that retail sales were flat in August. The government retail sales report is the first major read on consumer spending, which accounts for 70 percent of economic activity, for August.

Some analysts expect oil prices to rise over the next year despite weak demand growth in developed countries. Goldman Sachs forecasts Brent crude will jump to $130 in 12 months because of strong consumption in developing nations such as China and less-than-expected supply from non-OPEC producers.

"Emerging market demand growth has remained quite robust and we anticipate it will remain quite supported over the next 12 to 24 months," said Allison Nathan, senior commodities economist with Goldman Sachs.

In other Nymex trading for October contracts, heating oil rose 5.46 cents at $2.9996 per gallon and gasoline futures gained 3.87 cents at $2.7645 per gallon. Natural gas for October delivery climbed 3.3 cents to $4.072 per 1,000 cubic feet.


Alex Kennedy in Singapore contributed to this report.