LONDON – Oil prices sank more than $2 a barrel Wednesday on rising crude supplies in the United States, a strengthening dollar and signs that China's energy appetite, while still growing, has its limits.
Rising interest rates, which could slow economic growth and energy demand, were also a factor. Brokers noted that technical and speculative trading magnified the selloff.
"When you run up quickly, you can also come off very quickly," said Tom Bentz, a broker with BNP Paribas Commodity Futures in New York.
Light, sweet crude fell $2.22, or 4 percent, to settle at $53.81 per barrel on the New York Mercantile Exchange (search), where oil futures are down nearly $4 a barrel since the intraday high of $57.60 set last Thursday.
In London, Brent crude for May delivery settled at $53.04, down $1.55 on the International Petroleum Exchange (search).
Oil is roughly 45 percent more expensive than a year ago but still well below the inflation-adjusted peak above $90 a barrel set in 1980.
Prices at the pump are also soaring. Nationwide, a gallon of regular unleaded averages $2.11, up 21 percent from a year ago, with half of that gain coming in the past month.
Unleaded gasoline for April delivery settled unchanged on Nymex at $1.5749 per gallon. But after markets closed, gasoline futures zoomed several cents higher in electronic trading due to an explosion at a massive BP refinery complex in Texas City, Texas.
It was not immediately clear what type of production at the 1,200-acre facility would be affected, and for how long, but traders said any prolonged shutdown that affected gasoline output could keep the market on edge heading into the summer driving season. BP's Web site says the refinery produces 3 percent of all the gasoline consumed in the United States.
For the moment, the country has an ample supply of gasoline, analysts said. They cited the latest Energy Department (search) report, which showed inventories of gasoline 8 percent higher than a year ago despite a decline of 4.1 million barrels last week to 217.3 million barrels.
The agency also said in its weekly report that crude oil inventories rose by 4.1 million barrels last week to 309.3 million barrels, or 8 percent above year ago levels.
The rise in U.S. oil supplies coincided with evidence that the growth in oil demand in China may be slowing.
"The whole Asian region is now in the process of lower growth demand," said Frederic Lasserre of SG Securities in Paris.
In China, India, Thailand and Indonesia, rising domestic energy prices were dampening demand, said Lasserre. In China, for instance, demand was up 15 percent in November but growth slid to only 3 percent last month, he said.
Lasserre suggested that crude prices should be no higher than the mid-$40s, saying that supply fears over the past few months had resulted a "premium of at least $8 to $9" a barrel over market fundamentals.
A weak dollar also has factored into this year's price surge, so the strengthening of the U.S. currency this week has been having the opposite effect on the value of oil and other commodities.
While the oil price rally appears to have hit a wall, traders were confident that the era of high oil prices is not over.
"High energy prices will be with us for quite a long time," said James Cordier, president of Liberty Trading Group in St. Petersburg, Fla.
Cordier said the underlying factors were strong global demand and limited excess production capacity that can be tapped in the event of a supply disruption.
The Organization of Petroleum Exporting Countries (search), which produces roughly 40 percent of the world's oil, agreed last week to boost its output quota by 500,000 barrels a day but that did not cause prices to dip. On Monday, a key OPEC official said the group may raise output by another half million barrels daily.
But Venezuela's oil minister Rafael Ramirez said he had not received any information from fellow OPEC members on the additional increase, and said there was adequate supply.
Tensions and possible outages in key producers Saudi Arabia, Iraq, Nigeria and Venezuela have also helped fuel crude's rise over the past year.
Nigeria's two oil unions said Monday they would begin labor action in April. The African nation is the continent's largest exporter and the fifth-largest exporter to the United States.