Crude Drops

LONDON (Dow Jones)--Crude oil prices extended Friday's falls Monday as further strengthening in the dollar prompted traders to take profits from oil's recent rally to seven-month highs.

Crude dropped back towards $70 a barrel - with the outgoing ICE July Brent contract dipping below - as the rising greenback made commodities less attractive to investors seeking a currency and inflation hedge.

But prices were cushioned by both internal and external reaction to Iran's presidential elections results and fresh militant claims of attacks on Nigerian oil producing infrastructure.

"Looking at the Iranian news I would have expected [crude] to be higher, but at the moment the dollar rules," said Jim Rintoul, analyst at London-based trade advisory TheOilTrader.com.

At 1131 GMT, the front-month July Brent contract on London's ICE futures exchange was down $1.16 at $69.76 a barrel ahead of expiry later Monday.

The front-month July light, sweet, crude contract on the New York Mercantile Exchange was trading $1.10 lower at $70.94 a barrel.

The ICE's gasoil contract for July delivery was down $4.25 at $577.75 a metric ton, while Nymex gasoline for July delivery was down 191 points at 202.40 cents a gallon.

Iran saw protesters rail against the outcome of the weekend's presidential election, questioning irregularities in the voting process after incumbent President Ahmadinejad was reelected. U.S. and European governments also questioned the results .

While analysts didn't rule out a possible price reaction to the events, traders appeared more focused on the greenback and cautious of whether crude prices may have recently moved too far, too fast.

"There might be a knee jerk reaction to scenes of demonstrations in the street and arrests, by oil traders expecting prices to go up," said Manouchehr Takin, senior analyst at London's Center for Global Energy Studies. "But they will realize in a few days or weeks that the world will go on."

Geopolitical tensions surrounding Iran have tended to support oil prices given the country's position as the second largest producer in the Organization of Petroleum Exporting Countries and its proximity to the waterways through which much Middle East crude flows.

Despite crude's move lower Monday, market participants warned prices still remain susceptible to further gains, particularly to any news suggesting the worst of the global downturn has now passed. Economic optimism has helped spur a doubling in crude prices in the last six months as investors chase riskier assets for higher returns, but the move has come without a corresponding improvement in near-term market fundamentals, many analysts say.

"Modest improvements in the underlying fundamentals are reflected in wildly disproportionate increases in prices as commodities investors pile in," said analysts at KBC Market Services in London. "We live in a world where tomorrow's oil price is with us today."

Any further strengthening in the dollar could trump fundamental oil market developments, analysts suggested.

The dollar climbed against most other major currencies Monday on investor relief that a weekend meeting of the world's leading finance ministers generated nothing to shake the currency's reserve status.

"In very short term it's a case of watching the dollar and all the stories behind why the dollar is picking up again," said Ole Hansen, managing director of futures and fixed income trading at Saxo Bank in Copenhagen.

Nigerian militants said they had destroyed three Chevron Corp. (CVX) facilities in the Niger Delta over the weekend and threatened to extend their operations to other states in the oil-rich region. Neither the Nigerian military or Chevron were immediately available for comment.



from the wall street journal