Crude Hits Three-Week Low

The July contract goes below $69 amid a broad selloff in commodities.
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Updated from 12:11 p.m. EDT

Oil prices tumbled Tuesday as inflation fears, a lower estimate of future crude demand and a weakening tropical storm brought out the sellers.

Light, sweet crude closed down $1.80, or 2.5%, to a three-week low of $68.56 a barrel. The decline came amid a broad sell-off in commodities and related stocks. Shares of drillers and oil service companies were off 2%.

Concerns about inflation lingered in the market despite just a modest uptick in producer prices last month. Wholesale prices of finished goods inched up 0.2% in May, compared with 0.9% in April, according to the U.S. Labor Department. Excluding food and energy, core prices rose 0.3% in May -- the highest in three months -- versus 0.1% the previous month.

The higher-than-expected increase in core prices boosted concerns the

Federal Reserve

will hike rates by a quarter percentage point to 5.25% at its meeting later this month. Bank officials have tried to rein in the economy and stave off inflation via 16 consecutive quarter-point increase in the official fed funds lever. Should economic growth stall, demand for oil will fall, traders suspect.

In May, the Commerce Department said, retail sales climbed a modest 0.1%, as sales of car parts, vehicles, furniture and building materials tumbled. The markets interpreted the lower reading as a sign that energy prices, which are up 16% this year, are shaving economic growth.

High energy prices likely will cut oil demand growth worldwide this year, the International Energy Agency said Tuesday. The Paris-based group shaved its estimate for global crude demand growth by 10,000 barrels per day to 1.24 million barrels per day even though higher growth is projected in China and the U.S.

The IEA, which advises 26 countries on energy policy, revised its estimate for world oil demand up by 70,000 barrels to 84.9 million barrels a day thanks to strong global demand.

Despite higher consumption and surging prices, the Organization of the Petroleum Exporting Countries, which produces 40% of the world's crude, is worried people will start using alternative energies in lieu of oil. OPEC has opted to continue producing flat out at 28 million barrels per day to keep global inventories high and to drive down prices.

" OPEC is not comfortable with high prices," Mohammed Barkindo, OPEC's acting secretary general, told

Bloomberg

on Tuesday. "Prices that are too high will drive people from oil."

The first storm of the hurricane season, Alberto, lashed Florida with high winds and rain Tuesday morning, but missed oil installations in the Gulf of Mexico and was weaker than expected. Although a hurricane warning was issued for parts of Florida's west coast Monday, Alberto's winds were not strong enough Tuesday to be considered one. A storm needs wind speeds of at least 74 miles per hour to be classified as a hurricane.

Traders follow the progress of tropical storms in the Gulf of Mexico because a quarter of the country's oil and natural gas production is located there. Last year, hurricanes Katrina and Rita damaged 457 pipelines and destroyed 113 platforms, shutting down production for weeks. Nearly two weeks into the hurricane season, 16% of the area's oil output is still down.

Lower domestic supplies, production cuts in Nigeria and Iraq, and booming demand in Asia and the U.S. have kept energy prices high for the last two years. A threat of lower crude exports from Iran, which is negotiating with the West over its nuclear development activities, has also propped up energy prices. Iran is the world's fourth-largest crude producer and controls the Strait of Hormuz, a waterway through which 20% of the world's crude travels every day.

Gasoline supplies are expected to climb for the seventh week in a row in the U.S. Energy Department's weekly petroleum update due out on Wednesday at 10:30 a.m. EDT. In a

Bloomberg

poll of analysts, estimates called for gasoline stockpiles to climb by 1.4 million barrels and distillates to jump by 1.2 million barrels.

As petroleum products climb, supplies of crude, which is refined into gasoline and heating oil, were expected to drop by 700,000 barrels. Refining capacity is projected to gain 0.40% to 91.4%.

Rising gasoline supplies haven taken some of the pressure off of gasoline prices, which have declined to a nationwide average of $2.90 a gallon. Inventories and prices have been high this year because refiners had to phase in ethanol while they were switching over to making summer blends of gasoline.

Lower crude prices and gains in supplies pushed down prices of heating oil by 6 cents to $1.93 a gallon and gasoline by 7 cents to $2.05 a gallon.

Natural gas prices disregarded warm weather predictions and declined 6 cents to $6.16 per million British thermal units. Above normal temperatures are expected to blanket much of the country over the next two weeks, according to the National Weather Service. As temperatures climb, demand for air conditioning and electricity rises at utilities that use natural gas.

In trading Tuesday, shares of oil service companies were down 2% on the Philadelphia Oil Service Index.

Global Industries

(GLBL)

,

National Oilwell Varco

(NOV) - Get Report

, and

Rowan Companies

(RDC)

were posting the largest increases, down 5%.

Exploration companies were dipping 2%, with

Occidental Petroleum

(OXY) - Get Report

,

Marathon Oil

(MRO) - Get Report

and

Kerr-McGee

(KMG)

, each down 4%, leading declines.