Oil prices drop over Dubai worries

A fall to nearly $72 a barrel comes as gold also tumbles, with investors taking refuge in the dollar and the yen

Oil's rebound has been driven by a weak US dollar and optimism about economic recovery - not increased demand or tight supply.
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The price of oil has become the latest casualty of the unfolding Dubai debt drama, as crude fell more than five per cent towards US$72 per barrel in New York yesterday, retreating to its lowest level in six weeks. It is well off its high for the year of $82, reached about a month ago. Analysts said market sentiment had been dented by the Dubai Government's unexpected request on Wednesday for the creditors of its Dubai World conglomerate to agree to a "standstill" of at least six months in payments of nearly $60 billion (Dh220bn) of liabilities. The request came with an announcement to restructure Dubai World.

"The Dubai situation is very worrying, and people are obviously worried about a potential domino effect if Dubai can't pay off their debt," Benson Wang, a senior adviser at Commodity Broking Services in Sydney, told Reuters. "This episode has destroyed the confidence between borrowers and lenders, and it has also shaken the confidence about the pace of a global economic recovery." Gold and other commodities also fell sharply yesterday, and equities lost ground, as investors fearing a second financial storm searched desperately for a haven. They settled on the yen and the US dollar, sending both currencies up against the euro.

Gold was down about 2 per cent yesterday to $1,165 an ounce, after hitting a record $1,196.80 earlier in the week. Max Layton, a commodities analyst at Macquarie in London, said: "Gold is mirroring the US dollar. People are selling off riskier assets." One of those is oil, which has more than doubled in price since last December, when crude bottomed out at $32 a barrel after tumbling from a record $147 a barrel the previous July. Oil's rebound has been driven by US dollar weakness and investor optimism about imminent economic recovery rather than any tightening of supply and demand fundamentals.

Economic recovery has proved elusive, however, leaving oil markets "swimming" in inventory, the investment bank Goldman Sachs said yesterday. Dubai's surprise announcement has now stoked fresh doubts about the world's ability to bounce back from its worst financial and economic meltdown in decades. Analysts took heart in the financial strength of Abu Dhabi, whose sovereign savings could pay off Dubai's debts several times over because of decades of oil revenue surplus.

"Dubai as a state is not on the verge of bankruptcy, thanks to the support of Abu Dhabi," said Pascal Devaux, the Middle East risk assessment economist at BNP Paribas. Dealers said oil prices could slide further if the global economy failed to sustain a recovery. Some technical analysts who base their forecasts on historical price trends have warned that crude could fall to $65 after yesterday's move.

The Central Bank has so far pumped $10bn into the Dubai Financial Support Fund, and two Abu Dhabi-based commercial banks have raised a further $5bn. The liabilities of Dubai World may account for as much as half of Dubai's total government and corporate debt, according to an estimate by the bond rating agency Standard & Poor's. Until Wednesday, Dubai officials had signalled that those debts would be paid on time.

tcarlisle@thenational.ae