Oil prices rebounded from a seven-week low on Thursday in what traders said was technical trading and a short covering bounce after recent declines left the market oversold. "It looks like we have a technical bounce on a short-covering rally here, after crude has fallen about 16 percent from the record and heating oil about 15 percent from its own high," said Andy Lebow, broker at MF Global in New York.
"But it remains to be seen whether this rally will hold." US light crude settled at $125.49 a barrel, up $1.05. London Brent crude settled at $126.44, up $1.15, after falling to a seven-week low of $124.10 earlier. Oil prices had been sliding from a record high set earlier this month on mounting fears that soaring energy costs and economic turmoil in the United States were cutting demand from the world's largest consumer nation.
Adding some support Thursday was the threat from a militant group to sabotage oil facilities in exporter Nigeria. The main militant group in Nigeria's oil-producing Niger Delta said on Wednesday it would attack major oil pipelines in the next 30 days to prove it had not received payment from the government to end its campaign.
Earlier on Thursday, prices extended Wednesday's losses, pressured by US government data that showed a larger-than-expected increase in gasoline stocks together with weak implied demand. US crude stocks dropped after a sharp decline in imports.
Crude futures reached a record high of $147.27 on July 11, which analysts said was tied to weakness in the US dollar which encouraged some investors to buy oil and other dollar-denominated commodities as a hedge against inflation and declines in other asset classes.
Analysts said the price drop in oil and other commodity markets since mid-July has coincided with some traders unwinding short-dollar/long-oil positions, which helped to lift the US currency to a one-month high against the yen.
Even after the recent price fall, oil prices have still rallied by almost 30 percent in 2008 and are up from just $20 in 2002 due to demand from growing economies like China. Producers have expressed confidence that strong demand will continue.
"Global demand is heading for an increase and there is no fear that demand will weaken over the coming five years," Mousa Marafie, a member of the Supreme Petroleum Council in Opec nation Kuwait, told the state news agency KUNA. "The current decline in prices is in the end a temporary decline," he said.
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