Oil tumbles below $120 a barrel

Crude prices lower as investors await Fed rate decision and its impact on the dollar.
By Kenneth Musante, CNNMoney.com staff writer
Last Updated: August 5, 2008: 1:08 PM EDT
NEW YORK (CNNMoney.com) -- Oil prices fell near $120 a barrel Tuesday, as investors anticipated further economic weakness in the United States, which could erode demand for crude products.
U.S. crude for September delivery fell $1.14 to $120.27 a barrel in electronic trading. It traded as low as $118 a barrel before rebounding.
Crude last reached $118 on May 5, when prices rose $3.65 to settle at $119.97 a barrel.
On Monday, oil settled down $3.69 to $121.41 a barrel.
Fed meeting: Investors are keeping an eye on the Federal Reserve's policy announcement, which is due at 2:15 p.m. ET.
The Federal Reserve is largely expected to leave its key rate unchanged at 2% as it tries to balance rising inflation and weak economic growth. But investors will be looking closely for any hints policymakers make about the future direction of rates.
Over the past several months, the Fed has either cut rates to inject liquidity into the market, or held them steady to ward off inflation. Some policymakers, such as Minneapolis Fed president Gary Stern, have called for rate increases to cope with rising inflation, according to reports.
"If the number of dissenting Fed directors increases, that would be bullish for the dollar," said James L. Williams, head of WTRG Economics in London, Ark.
The potential of a stronger dollar would send crude prices lower, since oil is traded in dollars and it would take fewer dollars to buy a barrel.
Falling demand: Weekly reports from the Department of Energy have indicated demand for crude products is well below what they were a year ago.
Meanwhile the market has been talking about falling demand from Europe and Japan, as well as developing nations such as China, according to Jim Ritterbusch, president of energy consulting firm Ritterbusch and Associates in Galena, Ill.
"We're still responding to both anecdotal evidence and statistical evidence that demand is falling," Ritterbusch said.
Expensive gasoline: High fuel prices have weighed heavily on consumers in the U.S., the world's largest oil consumer.
A daily survey from motorist group AAA showed Tuesday that while average gas prices have fallen for 19 straight days to $3.871 a gallon, they're still more than $1 higher than a year ago. Gasoline prices hit a record high of $4.114 at the pump on July 16.
A recent CNN/Opinion Research poll found that 75% of respondents said prices at the pump are a "financial hardship," up from 60% in April.
"People are just figuring out ways to drive a little bit less," said Brian Youngberg, senior energy analyst with Edward Jones in St. Louis. "They're not taking that extra trip down to the corner grocery store."
Election: Responding to public outcry on high oil prices, Democratic presidential candidate Barack Obama laid out an energy plan Monday that would include releasing 70 million barrels of crude from the Strategic Petroleum Reserve and accepting a "limited amount" of new offshore drilling in the U.S.
Republican opponent John McCain has supported new drilling for several weeks, and was scheduled to tour the Fermi 2 nuclear plant outside of Detroit on Tuesday. Both candidates have pushed for the development of non-fossil fuels.
Edouard: Concerns about supply disruptions in the Gulf of Mexico dissipated as Tropical Storm Edouard failed to reach hurricane strength as it struck the Texas coast, and just grazed vital off-shore oil facilities near Galveston, Texas, according to reports.
First Published: August 5, 2008: 7:12 AM EDT