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BLBG: Oil Falls More Than $3 as Dollar Climbs, U.S. Fuel Demand Drops
By Mark Shenk

Oct. 2 (Bloomberg) -- Crude oil fell more than $3 a barrel as the dollar reached a one-year high against the euro and U.S. fuel demand dropped to the lowest since the last recession.

Oil has tumbled 11 percent so far this week as the euro dropped against the U.S. currency amid signs that Europe's economy is slowing. Fuel use over the past four weeks averaged 19 million barrels a day, the lowest since October 2001, an Energy Department report showed yesterday.

``The first thing I look at when I come into the office now is the dollar,'' said Nauman Barakat, senior vice president of global energy futures at Macquarie Futures USA Inc. in New York. ``I think the dollar's strength pretty much explains the movement of the oil market today. Also, yesterday's report showed very anemic product demand.''

Crude oil for November delivery fell $3.80, or 3.9 percent, to $94.73 a barrel at 11:11 a.m. on the New York Mercantile Exchange. Prices, which are up 18 percent from a year ago, have dropped 36 percent from the record $147.27 a barrel reached on July 11.

The drop in oil accelerated after an Energy Department report showed that U.S. supplies of natural gas, a competing fuel, rose more than forecast.

``We are going to soon test $93.36, the low the other day,'' said Tom Bentz, senior energy analyst at BNP Paribas in New York. ``If prices get below $93.36 we will soon test $90 and then $86.11, which was the low on January 22.''

Dollar Rebound

Investors looking to hedge against the dollar's decline earlier this year helped lead oil, gold, corn and gasoline to records. The U.S. currency has rebounded since touching a record low of $1.6038 per euro on July 15.

The euro declined to $1.3818, from $1.4009 yesterday in New York. It touched $1.3748, the weakest level since Sept. 7, 2007.

The U.S. Senate passed a $700 billion financial-market rescue package loaded with inducements for the House of Representatives to approve the measure following its rejection of an earlier version.

``A perception is developing that even if the rescue plan is passed by the House, it won't address the underlying problems that threaten the economy,'' Barakat said. ``If the economy continues to weaken, oil prices will tumble.''

Orders to U.S. factories decreased in August by the most in almost two years, signaling business spending slowed down even before the recent worsening of the credit crunch. The 4 percent drop in bookings was larger than forecast and followed a revised 0.7 percent increase in July that was smaller than previously estimated, the Commerce Department said today.

Merrill Forecast

Prices may fall as low as $50 a barrel next year in the event of a ``global recession,'' Merrill Lynch & Co. said in a report today. Such an occurrence is still ``unlikely,'' Merrill said, while reducing its 2009 oil forecast by 16 percent to $90 a barrel.

``Everyone in the oil market is looking at the wider economy and what that will mean for demand,'' said Rick Mueller, director of oil markets at Energy Security Analysis Inc. in Wakefield, Massachusetts. ``If prices keep falling, we will start hearing from OPEC. I don't think the Saudis would be upset seeing oil fall a bit further, but some others will.''

The Organization of Petroleum Exporting Countries, which supplies 40 percent of the world's oil, urged members to adhere more strictly to production quotas at its meeting in Vienna last month. OPEC is scheduled to hold its next meeting on Dec. 17 in Oran, Algeria. Saudi Arabia is the world's largest oil producer and OPEC's most influential member.

Brent crude oil for November settlement declined $4.14, or 4.3 percent, to $91.19 a barrel on London's ICE Futures Europe exchange.

To contact the reporter on this story: Mark Shenk in New York at mshenk1@bloomberg.net.