OREANDA-NEWS. August 05, 2008. In global petroleum market news, oil prices plunged to near USD 120 a barrel Tuesday in Asian trading on expectations the economic downturn in the U.S. will erode consumer demand for crude products.

Light, sweet crude for September delivery dipped USD 1.06 to USD 120.35 a barrel in electronic trading on NYMEX by midday in Singapore. The contract dropped USD 3.69 overnight to settle at USD 121.41 a barrel. In London, September Brent crude was down USD 1.05 at USD 119.63 a barrel on the ICE Futures exchange.

In our view, the main factor currently weighing on oil prices is worries about oil consumption being weakened, especially in the U.S. On Monday, the Commerce Department reported that consumer spending, after adjusting for inflation, fell 0.2% in June — the biggest drop since February — as shoppers dealt with higher prices for gasoline, food and other items. The soft consumer spending data came despite the arrival of tax rebate checks, part of a stimulus package the government hoped would spur purchasing.

We would also like to note that oil prices pulled back as Tropical Storm Edouard seemed less likely to disrupt oil and natural gas output in the Gulf of Mexico. Although Edouard was threatening to pick up strength from warm Gulf waters and gain near-hurricane speeds over the next 24 hours, it likely would not be strong enough to damage offshore oil and natural gas drilling platforms that lie in its path.

On the geopolitical front, investors brushed off continued tension over Iran's nuclear program. Representatives of the five permanent members of the U.N. Security Council and Germany agreed Monday to seek new sanctions against Iran after the country failed to meet a weekend deadline to respond to an offer intended to defuse the dispute. Iran's lack of response to an incentives package aimed at getting it to halt sensitive atomic activity left no option other than to pursue new punitive measures.

Also on Monday Iran announced that it has tested a new weapon capable of sinking ships nearly 320 kilometers away, and Tehran reiterated threats to close a strategic waterway at the mouth of the Gulf if attacked. Up to 40% of the world's oil passes through the Strait of Hormuz, a narrow passage along Iran's southern coast, and any move by Iran to close it to tanker traffic would send oil prices skyrocketing.

We believe that at present the market is focused on weakness in demand due to the sagging U.S. economy, while geopolitics and other fundamentals have receded into the background for the time being. Crude futures have fallen about USD 27, or about 18%, since soaring to a record high of USD 147.27 on July 11.