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Tuesday saw the biggest drop in the price of oil since the beginning of "the first Gulf war" in January 1991, when the per-barrel price fell by more than $10, the Financial Times reported early Wednesday.[1] -- On Tuesday, "NYMEX August West Texas Intermediate lost $5.34 to $136.04 a barrel, having shot to a record $145.85 on Friday," Robert Cookson said. -- "Traders put the move down to suspicions that the dollar, in which oil is priced, had overcome its period of weakness, as well as a perceived easing of tensions in the Middle East," with reassuring comments coming from Iranian President Mahmoud Ahmadinejad, he said. -- In addition, "[m]arket concern over Hurricane Bertha receded, with computer models indicating it would steer clear of the oil-rich Gulf of Mexico." -- Most other commodity prices also declined. -- Bloomberg News took a different interpretive tack, attributing the decline above all to "signs that the global economy may slow."[2] -- Mark Shenk quoted Michael Lynch, president of Strategic Energy & Economic Research in Winchester, Massachusetts, who said: "All the bad economic news is making people take a second look at commodities. Commodities were purchased as a hedge against inflation. A global recession is looking more likely, and it's the greatest weapon in the fight against inflation." -- Market Watch asked "Have commodities peaked?" and one expert said that "It's certainly possible."[3] -- "But whether or not oil and other commodities are experiencing just another correction in a bull market, or a lasting reversal, remains an open question," said Mark Godt. "Many market strategists simply point out that no market can keep rising to new records in a straight line." ...

Oil prices slid more than $5 on Tuesday in their biggest one-day fall since the start of the first Gulf war in January 1991 -- when the U.S. moved to calm markets by releasing 70m barrels from its reserves.

Oil fell after traders lost confidence in last week’s surge above $146 a barrel. In volatile trading, crude futures came under pressure from a stronger dollar and the worries that last week’s rises were overdone.

On Tuesday, ICE August Brent crude fell $5.44 to close at $136.43 a barrel. It fell $4 in the previous session. At one point, Brent was down more than $6 to $135.50. Last Friday, it hit a record $146.69 a barrel.

NYMEX August West Texas Intermediate lost $5.34 to $136.04 a barrel, having shot to a record $145.85 on Friday.

“Prices had moved too far, too fast,” said Kevin Norrish of Barclays Capital, arguing that the fall reflected short-term volatility rather than long-term change in supply and demand fundamentals.

Traders put the move down to suspicions that the dollar, in which oil is priced, had overcome its period of weakness, as well as a perceived easing of tensions in the Middle East.

Mahmoud Ahmadinejad, Iran’s president, on Tuesday dismissed the possibility of war with Israel or the West over his country’s nuclear ambitions. “We’re making the utmost effort for providing peace and security at the world level,” he said.

Market concern over Hurricane Bertha receded, with computer models indicating it would steer clear of the oil-rich Gulf of Mexico.

Traders said last week’s surge to record highs had squeezed refiners’ profit margins to such an extent it was leading to weaker demand from them.

The Group of Eight leading industrialized nations, at their summit in Japan, said they were very worried about the impact of oil prices on the world economy and pledged to create a forum to discuss ways of avoiding future spikes.

“Concerted efforts are needed to address the underlying causes [of record oil prices] for the benefit of all. On the supply side, production and refining capacities should be increased in the short term,” the Group of Eight said.

Base metals also experienced heavy selling. Aluminium, which jumped to a record high on Monday, had its gains wiped out as it fell 4.9 per cent to $3,150 a ton. It had soared in the previous session as power shortages in China forced smelters to cut production of the metal. Those worries crumbled on Tuesday as traders sold base metals across the board.

Copper lost 3 per cent to $8,193 a ton, retreating further from last week’s record high, while zinc dropped 3.3 per cent to $1,770 a ton and nickel was down 1.7 per cent at $20,600 a ton. There were no initial reports of injuries or damage at copper mines in Peru after it was hit by a [quake] that measure[d] 6.2 on the Richter scale.

Lead, which fell to a one-year low last week, rose 1.7 per cent to $1,646 a ton.

The London Metal Exchange said trading volumes had hit a record in the first half of 2008, rising 17.5 per cent from 2007.

Agricultural commodities weakened, with CBOT July corn down 35 cents to $6.81 a bushel while CBOT July wheat slipped 9 cents to $8.13 a bushel.

CBOT July soyabeans were 47 cents lower at $15.41 a bushel, retreating from a record $16.63 on Friday.

OIL IS STEADY AFTER FALLING ON SIGNS GLOBAL ECONOMY IS SLOWING
By Mark Shenk

Crude oil was trading near $136 a barrel in New York after falling the most in three months yesterday, as signs that the global economy may slow prompted investors to sell commodities.

Oil in New York has dropped more than $9 since reaching a record $145.85 a barrel on July 3. Gold, silver, copper, and corn also declined. The U.S. economy has sagged amid credit-market and housing slides. Contracts to buy previously owned homes fell more than forecast in May, signaling prices have yet to bottom.

"All the bad economic news is making people take a second look at commodities," said Michael Lynch, president of Strategic Energy & Economic Research in Winchester, Massachusetts. "Commodities were purchased as a hedge against inflation. A global recession is looking more likely, and it's the greatest weapon in the fight against inflation."

Crude oil for August delivery fell 16 cents to $135.88 a barrel at 8:07 a.m. Sydney time on the New York Mercantile Exchange. Yesterday, oil tumbled $5.33, or 3.8 percent, to settle at $136.04 a barrel, the biggest drop since March 31. Futures lost 6.4 percent in the previous two days, the biggest two-session decline since March 19 and 20. Prices are up 87 percent from a year ago.

An index of pending U.S. home resales fell 4.7 percent following a revised 7.1 percent gain in April that was greater than previously reported, the National Association of Realtors said today in Washington. The prospect of further price declines may be discouraging offers, while rising mortgage rates and tougher lending standards make it harder to qualify for loans.

"There is more concern about the U.S. economy," said Kyle Cooper, an analyst at IAF Advisors in Houston. "There was a feeling that the U.S. doesn't matter because of growth elsewhere, but the country is still responsible for about 25 percent of world oil consumption."

Sales of services and manufactured goods in the U.K. fell in the second quarter, posing "serious risks" that the economy will tumble into a recession, the British Chambers of Commerce said today. An index based on a survey of 4,758 services companies fell to minus 2, the lowest since 1992, from 17, according to the London-based lobby group.

"We have strong concerns about the sharp rise in oil prices," the Group of Eight said in a statement today in Tokyo, where the leaders are holding their annual summit. "The world economy is now facing uncertainty and downside risks persist."

The U.S. is "very close to a disaster" because it imports almost 70 percent of its oil, investor Boone Pickens said during an interview with CNBC, unveiling a strategy to limit the country's dependence on foreign crude.

Pickens, founder and chairman of Dallas-based BP Capital LLC, made his comments as Congress has been investigating the role of speculators in oil's rise over the past year. Pickens said the gains are because global demand exceeds supplies.

Oil also fell today as negotiations continued between Iran and Western governments over the country's nuclear program. President Mahmoud Ahmadinejad dismissed the possibility of a war with the U.S. and Israel over his country's nuclear work, saying Iran is trying to avoid conflict.

"We're making the utmost effort for providing peace and security at the world level," the Iranian president told reporters yesterday in Kuala Lumpur, where he is attending a summit of the Eight Islamic Developing Countries. "Don't worry, there won't be any war in the future. Mainly they are focusing on some sort of propaganda or psychological war."

Iran has said it may blockade the Strait of Hormuz, the shipping lane for a fifth of the world's crude, if its nuclear facilities are attacked. The country has the second-biggest proved oil reserves and is the second-biggest producer in the Organization of Petroleum Exporting Countries.

"There's been some reassurance about the dispute with Iran, which is taking some of the risk premium out of the oil market," said Rick Mueller, director of oil practice at Energy Security Analysis Inc. in Wakefield, Massachusetts.

Brent crude oil for August settlement declined $5.44, or 3.8 percent, to settle at $136.43 a barrel on London's ICE Futures Europe exchange, the biggest drop since March 19. Prices climbed to a record $146.69 on July 3.

The UBS Bloomberg Constant Maturity Commodity Index, which tracks 26 raw materials, declined 2.6 percent to 1,633 today, the biggest decline since March 19. Gold fell for a fourth day.

The U.S. dollar rose against the euro, limiting the appeal of commodities as a hedge against inflation. The currency climbed 0.5 percent to $1.562 per euro at 3:13 p.m. in New York, from $1.5726 yesterday.

"Any time the dollar moves higher, you are going to see folks shift away from the commodity markets," Mueller said.

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

NEW YORK -- After rallying to new stratospheric levels through last week, the price of crude oil and of other commodities prices has been sliding rapidly over the past two sessions, raising the question: Have commodities peaked?

"It's certainly possible," said Paul Nolte, director of investments at Hinsdale's Associates. "I think that we're in the early stages, and we could see a drop of 20% to 30% from peaks in energy prices, and energy has been the poster child for other commodities."

On Tuesday, crude oil prices tumbled over $5, their biggest daily decline in nearly four months, to close at $136.04 a barrel. In just two sessions, crude has lost $9.25, or 6.4%. See Futures Movers.

"We were way due for a correction in oil," said Frank Holmes, chief executive of U.S. Global Investors.

Holmes, who has been and remains very bullish on commodities mostly because of insatiable and growing demand from China and India, still believes oil can fall back to $100 a barrel but remain in a rallying mode overall.

Other commodities have followed along in the two-day slide, starting with food futures. Corn futures fell sharply for a third day Tuesday, losing over 3% to $7.25 a bushel on the Chicago Board of Trade, followed by big drops in soybeans and wheat futures.

Possible causes for the declines are plenty, including a firmer dollar, a weakening U.S. economy that is hitting demand, and Congressional efforts to bring down gasoline prices ahead of the U.S. presidential elections.

But whether or not oil and other commodities are experiencing just another correction in a bull market, or a lasting reversal, remains an open question. Many market strategists simply point out that no market can keep rising to new records in a straight line.

"Even a 20% to 30% correction would take a long while to unfold and only if we continue selling off after that will we know if the commodities bubble is over, just like what we saw in technology in late 2000," Nolte said.

Last week, crude oil prices hit a record $145.85 before sliding over the last two sessions. Through the first of half of the year, crude had surged 46%, including a spectacular 38% gain in the second quarter and a 10% advance for the month of June.

"When something is unsustainable, it has to give in," said Barry Ritholtz, director of equity research at Fusion IQ. "With oil prices nearing $150 a barrel and looking as if they were headed to $300, we're in a situation where at some point it hurts the economy and demand destruction weighs on prices."

Besides oil, many other commodities rallied this year, starting with food. The price of corn futures jumped 21% in June, gained 28% in the second quarter and surged 60% in the first half of the year.

Among precious metals, gold jumped 11% in the first half of the year while silver was up over 17%. Among base metals, copper jumped nearly 28%.

But it's oil, along with gasoline prices, that have made headlines around the world. Besides the fundamental factors of supply and demand, oil also tends to gain when geopolitical tensions rise and disasters, such as hurricanes in the Gulf of Mexico, threaten to hit production.

"All we need is one headline and crude oil would be back up $5," said Bill O'Neill, managing partner at Logic Advisors.

The recent two-day slide just takes the edge off huge gains in commodities so far this year, a trend that keeps many strategists cautious on calling a peak in prices.

"There's some room for a near-term correction but we can't say the commodities bull run is over," O'Neill said. "We have seen two or three such corrections over the past year. It's vastly premature to reach the conclusion that this time commodities have topped."

On the one hand, after sliding over the past year the dollar has stabilized since March and began firming in late May. A firmer U.S. unit pressures dollar-denominated commodities, such as crude oil, because it makes them more expensive for holders of other currencies.

"I have been a dollar bear ever since the fourth quarter of 2001 but I'm no longer bearish," said Jeffrey Saut, market strategist at Raymond James. The strategist noted that, since 2002, the dollar has now fallen over 40% against its major rival the euro.

Saut has also been and remains a long-term commodities bull. But he believes that the commodities bull run may have run out of steam, even if only temporarily. The main factor shaping his view is the approach of the U.S. presidential elections in November.

"There is a lot of nervousness, especially in energy pits, about the efforts underway to propose wrong-footed legislation from politicians who want to bring down the price of gasoline," Saut said.

"I don't believe we have a speculative bubble, but these moves are going to drive a lot of hot money out of commodities pits between now and the elections," he said.

Meanwhile, some analysts, such as Robert Pavlik, chief investment officer at Oaktree Asset Management, believe the sell-off in commodities and commodities-related stocks, can provide a good entry point for long-term investors.

Along with commodities, energy and materials stocks also sold off on Wall Street Tuesday, led lower by the likes of Chesapeake Energy, Apache Corp, and Noble Corp on the energy side, and by the likes of U.S. Steel Corp., Nucor, and Freeport McMoran Copper & Gold among materials.