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U.S. Government Spending Cuts Weigh on Oil Prices

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The price of oil hovered below $91 a barrel on Monday as markets continued to digest the introduction in the U.S. of automatic government spending cuts which could hurt the world's leading economy.

By early afternoon in Europe, benchmark oil for April delivery was up 6 cents to $90.74 a barrel in electronic trading on the New York Mercantile Exchange. On Friday, the contract fell $1.37 to close at $90.68 a barrel on the Nymex, its lowest close this year. Earlier on Monday, it slipped as low as $90.09 before recovering.

Spending cuts of roughly $85 billion automatically kicked in on Friday after President Barack Obama and Congress failed to meet a deadline for striking a deal to avert or soften the reductions. Negotiations on Sunday ended in a bitter impasse, and what happens next is anyone's guess.

The International Monetary Fund has predicted that the spending cuts could reduce U.S. growth by some 0.5 percentage point in 2013.

While a month ago the Nymex contract was close to exceeding $100 a barrel, analysts said prices could continue to slide.

"Looking at oil market fundamentals, the demand for crude, due to elevated maintenance activity at refineries, will stay near or at seasonal lows for the coming weeks, which would, in the short-term, favor an extension to the downside," said a report from JBC Energy in Vienna. "The biggest risks to the upside stem from the geopolitical side as well as the remote possibility that a move to new all-time highs in the main U.S. equity indices could spark a broader speculative rally."

Speculative investors have been reducing positions betting on rising prices, also weighing on prices.

"The continuing retreat of financial investors is putting prices under pressure," said analysts at Commerzbank in Frankfurt. "In view of the still relatively high level of speculative net long positions, there is further downside potential here."

Fairly steady gains by the dollar against the euro over the past month have also made crude more expensive and a less attractive investment for traders using currencies other than the dollar. While the euro was worth more than $1.36 on Feb. 4, on Monday it was trading at just over $1.30.

"The strengthening dollar is currently the key element for the downside momentum in the oil market, weighting on market sentiment and limiting risk appetite," said a market note from Sucden Financial Research.

Brent crude, used to price many kinds of oil imported by U.S. refineries, was up 13 cents to $110.53 a barrel on the ICE Futures exchange in London.

In other energy futures trading on the Nymex:

  • Wholesale gasoline fell 0.03 cent to $3.1283 a gallon.
  • Heating oil added 0.48 cent to $2.9349 a gallon.
  • Natural gas lost 1.6 cents to $3.44 per 1,000 cubic feet.

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