Oil falls as demand starts to ease

London: Oil fell by around $2 a barrel to $126 a barrel on Tuesday, after the US Federal Reserve issued a rare warning on the inflationary risk posed by a weak dollar.

US crude was down $1.78 at $125.98 a barrel by 1502 GMT after earlier hitting a session low of $125.65.

London Brent crude fell $1.72 to $126.30 a barrel.

One of the factors driving investment in commodities this year has been the weakness of the US currency, which encourages the buying of dollar-denominated commodities as a hedge against inflation.

"[Federal Reserve Chairman Ben] Bernanke seems more concerned about inflation than growth and for the first time that I remember he brings the weak dollar into the macro picture by linking rising import costs - inflationary - to the front page," said Tom Sowanick of Clearbrook Financial.

Some analysts say oil's rapid rise of about 30 per cent since the start of the year had a speculative element. That was the view of influential hedge fund manager George Soros.

"We are currently experiencing the bursting of a housing bubble and, at the same time, a rise in oil and other commodities that has some of the earmarks of a bubble," Soros said in prepared testimony before the US Senate.

"To be sure a crash in oil markets is not imminent."

Analysts said there was mounting evidence demand for oil was easing and expectations that Asian econ-omies, which have led growth in fuel consumption, will slash subsidies because they have become too costly.

Indonesia, Sri Lanka and Taiwan have already announced cuts to subsidies, while Malaysia said it would scrap fuel price controls in August in a move that could double pump prices.

India is also expected to raise fuel prices today.

End consumers

"The high oil price will clearly be more keenly felt by the end-consumer without these subsidies," said Tom Nelson, an analyst for the Guinness Global Energy Fund, which takes long-only positions in oil and gas firms.

"It's difficult to ascertain the demand destruction this could lead to," he said.

The head of the International Energy Administration (IEA) said on Monday that world oil demand was shrinking more quickly than first thought and the IEA might cut its demand growth forecasts further.

Most of that decline in demand has so far been in developed economies as sharp price rises bite for consumers and industry.

"Demand figures are falling fast in Europe. We're seeing things cooling down," one broker said. "There are some big numbers being taken out of the market."

More evidence of the state of supply and demand will emerge with the release of US weekly stocks data on Wednesday.

Currency: Dollar advances

The dollar advanced broadly on Tuesday after Federal Reserve Chairman Ben Bernanke warned about the inflationary impact of a weak currency, suggesting the central bank is not likely to cut interest rates further this year.

The euro fell to a nearly three-week low versus the dollar at $1.5411, after trading higher earlier. By midday trading, it was at $1.5452, still down 0.6 per cent on the day. The dollar index rose half a per cent to 73.297, the highest since May 14. Against the yen, the dollar rose 0.7 per cent to 105.27 yen.