Oil sheds over $1 to drop below $145

London: Oil dropped below $145 a barrel on Friday, but was still within sight of record highs reached in the previous session when traders bought into the market ahead of a holiday weekend in the US.

US crude oil was down $1.28 at $144.01 a barrel by 1520 GMT, below an all-time high of $145.85 hit on Thursday. The contract has risen more than 50 per cent this year.

London Brent was down $1.49 at $144.59.

Prices fell more than a dollar after Iran said it would make a response to proposals from six world powers to try to resolve a long-running dispute over its nuclear development programme.

Iran subsequently handed its response to European Union foreign policy chief Javier Solana, but did not give any details about its content.

The US, China, Russia, Germany, Britain and France have offered trade and other incentives to Iran, which is facing sanctions because it has refused to give up its nuclear programme.

Investors had rushed into crude oil ahead of the US independence day holiday on July 4, because they were wary of any escalation in tensions between Iran and Israel that have contributed to oil's rise to a record of $145.85 this week.

Oil has gained about 50 per cent this year, driven partly by the tensions over Iran's nuclear programme, plus expectations that global oil supplies will not cope in the long term with strong demand growth from newly industrialising China and India.

The price spike has caused fuel protests worldwide and has begun to dampen demand in consuming nations, including the US, the world's biggest energy consumer.

The next milestone is $150 a barrel, which some analysts had predicted the market could reach by July 4. "It's going to go higher before it goes lower," said Christopher Bellew, of Bache Financial.

Collision course

"Two trains are rushing towards each other. One is ... rallying oil prices and the other is economic recession. At some point they're going to collide."

Investment flows into oil have contributed to the price surge, encouraged by commodities' strong returns this year versus a feeble showing from equities.

"I think the current market is driven by speculative money, not by fundamentals," said Takeda Makoto, an analyst at Bansei Securities. The weak dollar has also played a part in boosting oil, which is priced in the US currency.

Goldman Sachs, the biggest investment bank in the commodities sector, has tipped prices to hit $200 a barrel within two years.

Pain and protests

Already prices are undoubtedly causing pain as protests at rising costs have broken out across the world.

Consumers, particularly in the world's biggest energy burner the US, have begun to cut back on fuel use, but there is no ready substitute when it comes to transportation.

"You have to go to work, no matter what the price is," said Stephen Thornber, head of global energy research at Threadneedle Asset Management. "Fundamental demand for transport and energy is difficult to turn off in the short term, but disposable income will be hit."

A sustained period of growth across the world was largely reliant on cheap energy and policy makers are fearful the unprecedented rally on the oil market will undo that.

"The longer it stays at this level or the higher it goes, the more pain it is going to cause in lots of different industries," said Colin Morton at Rensburg Fund Management.

Even oil companies say their gains have been muted. "People think that at $140 we make fortunes," Repsol CEO Antonio Brufau said. "We pay fortunes in taxes, that's true, but the countries that benefit the most are the ones that own the reserves," he said.