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Oil falls below $58 as traders reconsider rally

VIENNA  — Weak U.S. oil demand and hefty oversupplies of crude yanked support from oil's rally on Monday, with prices falling below $58 a barrel.

Oil prices have jumped this month from near $50 as crude investors followed stock markets, which have surged on expectations the worst of a severe recession is over.

Benchmark crude for June delivery was down $1.46 to $57.17 a barrel by noon in European electronic trading on the New York Mercantile Exchange. On Friday, the contract rose $1.92 to settle at $58.63 a barrel, the highest level this year.

Monday's downturn appeared to reflect a return to fundamentals — investors have for weeks brushed off news of overflowing U.S. oil inventories, which rose to a 19-year high last week.

"Despite the market's optimistic outlook on the economy, the global recession lingers on," Vienna's JBC Energy noted. It said global oil demand was down by 1.5 percent from last year at this time.

The Dow Jones industrial average rose 2 percent on Friday while the Standard & Poor's 500 index climbed 2.4 percent, adding to a dizzying 37.4 percent leap since early March.

"Oil has been strongly influenced by stocks lately," said Victor Shum, energy analyst at consultancy Purvin & Gertz in Singapore. "Investors are counting on a global economic recovery to boost demand."

Then on Friday, the U.S. Labor Department said that employers cut 539,000 jobs in April. That was less than expected and the smallest reduction in six months. However, the nation's unemployment rate climbed to 8.9 percent, the highest since late 1983.

"Investors are really trying to look for green shoots," Shum said. "With the unemployment rate rising, there isn't any sign in the U.S. that oil demand is coming back."

"The price is very strong relative to the fundamentals," he said.

Oil prices surged to a record $147 a barrel last July on investor optimism that growing consumer demand, especially in emerging economies such as China and India, would outstrip limited supplies. Prices plunged to below $35 in March on the back of this year's global slowdown.

"A rally that's not driven by fundamentals can only go so far," Shum said. "At some point, there's going to be a pullback."

In other Nymex trading, gasoline for June delivery fell by more than 4 cents to $1.66 a gallon and heating oil dropped by close to 4 pennies to $1.48 a gallon. Natural gas for June delivery slid nearly 3 cents to $4.28 per 1,000 cubic feet.

In London, Brent prices fell $1.45 to $56.69 a barrel on the ICE Futures exchange.

Associated Press writer Alex Kennedy contributed to this report from Singapore.

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