Oil retreats, trades at $125.90 a barrel

Written by Reuters | London, July 31: | Updated: Jul 31 2008, 21:25pm hrs
Oil prices headed lower on Thursday, after a strong rally in the previous session ran out of steam.

US light crude for September was down 87 cents at $125.90 a barrel by 1022 GMT, after a jump of $4.58 on Wednesday.

London Brent crude was $1.17 down at $125.93 a barrel.

An unexpected fall in gasoline stocks last week in the United States, the world's biggest energy consumer, prompted a rebound in the market.

Oil has dropped about 18 per cent from a record of more than $147 on July 11, pressured by concerns over demand erosion, especially in the United States.

The fall from this peak to around a three-month low on Tuesday was the biggest drop on record in dollar terms.

"There was a gasoline-led rally, but now I think it's running out of puff. It seems to need constant bullish news at the moment to push it up," said Christopher Bellew, of Bache Commodities. "Everyone is talking about demand destruction."

Oil's six-year advance has been driven partly by strong demand growth from emerging economies such as China, India and the Middle East that could tighten the market's supply/demand balance over the long term.

Investors have piled into oil and other commodities as a hedge against inflation and as a more attractive play than bearish equity markets.

The weak US dollar has also contributed to oil's record run as it is priced in the US currency.

Analysts are not yet convinced that the sharp fall this month means the bull market in oil is over.

"Although oil prices have fallen around $20 from their peak, support at $120 held and that means there is the potential for prices to rise back to record levels again," said Shuji Sugata, manager at Mitsubishi Corp Futures and Securities Ltd in Tokyo.

Political tensions that have helped underpin the market returned to the spotlight when Iran said it would press ahead with its nuclear development plans.

Western powers had given Iran two weeks from July 19 to respond to their offer to hold off imposing more UN sanctions if Tehran would freeze any expansion of its nuclear work.

Rival militant factions in Nigeria's oil-producing Niger Delta have clashed this week in an apparent turf war, killing at least four people.

The fighting illustrates the deteriorating security situation in the Delta, the hub of Nigeria's oil industry, where unrest has shut down around a fifth of output.