Fall in demand sends oil price sinking to $127

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Oil prices hit a new six-week low yesterday, sinking under $127 a barrel on slowing demand in the US and Europe in the wake of soaring prices and weaker economic growth. The fall was strengthened as fears receded that oil rigs in the Gulf of Mexico would be hit by Hurricane Dolly.

The falls came as Lehman Brothers released a report that predicted the price of oil, far from hitting as high as $200 a barrel as some rivals forecast, would be at $90 early next year.

The oil price has fallen over 13 per cent since hitting a record $147.5 on 11 July, when it was lifted on fears of production constraints in Brazil and Nigeria, and as geopolitical concerns surrounding Iran were heightened.

Yet two weeks ago, the price of oil started to decline as demand waned, despite the fears over Dolly shutting down oil production from the Gulf of Mexico, which propped up the price slightly on Monday.

This follows a surprise rise in the US oil reserves, announced by the US Energy Information Administration last week, suggesting declining demand. The group reported that crude inventories in the United States, which is the largest oil consumer in the world, had actually risen by three million barrels to 296.9 million, rather than the expected decline of more than two million.

Edward Morse, an analyst at Lehman Brothers, said: "The deteriorating demand picture reinforces our belief that oil prices are reaching a tipping point, with prices expected to average $110 per barrel in the fourth quarter of the year and a further decline to a more supportable $90 per barrel by the first quarter of 2009."

The dollar has also strengthened, hitting a two-week high over the euro, which meant traders were less likely to invest in oil, which is seen as a natural hedge against the falling currency. The climbing dollar also sent gold, another currency hedge, down by more than 2 per cent yesterday.

The oil price has been hugely in focus this year as the levels have contributed to soaring bills and have helped to dampen consumer confidence.

American politicians, followed last week by their counterparts in the UK, have been looking into talk that the price has been purposely ramped by commodity traders.