Oil falls to five-month low as dollar strengthens

By Ikuko Kao and Matthew Robinson

LONDON (Reuters) - Oil fell on Monday as part of a broad selloff in the commodities markets after the U.S. government's takeover of mortgage financiers Fannie Mae and Freddie Mac fueled a run up in the U.S. dollar.

Dealers said the greenback's gains overshadowed a new hurricane threat heading for the U.S. Gulf of Mexico, home to a quarter of U.S. crude oil production and 15 percent of its natural gas output.

"I think it is because the dollar is pretty strong after the Fannie and Freddie bailout," said Phil Flynn, analyst at Alaron Trading in Chicago, refering to oil's losses. A strong dollar tends to soften commodities markets by weakening the purchasing power of buyers using other currencies.

U.S. crude futures fell $1.27 to $104.96 a barrel by 1630 GMT after dipping as low as $104.70 -- the lowest since early April -- adding to heavy losses since mid-July's peak over $147 on weaker energy demand from the United States and other developed economies.

London's Brent crude futures fell $1.55 to $102.54 a barrel after a problem with the trading system halted all activity on the Intercontinental Exchange (ICE.N) for more than an hour. Trading resumed at 1355 GMT.

Despite oil's losses, OPEC ministers gathering in Vienna for their output policy meeting scheduled for Wednesday were expected to leave formal production targets unchanged due to the threat from Hurricane Ike to U.S. oil output.

""Whilst observing the goings on in Vienna over the next few days, keep one eye on Hurricane Ike,"" Robert Laughlin with MF Global said.

Preparations for Ike have stalled recovery efforts after last week's Hurricane Gustav, which shuttered oil production and refineries in the region as it barreled onshore.

Ike weakened into a Category 2 storm on Monday after roaring ashore in northeastern Cuba, but was expected to strengthen into a dangerous Category 3 hurricane when it enters the Gulf of Mexico by midweek.

OPEC

OPEC ministers were widely expected to leave formal targets unchanged when they meet late on Tuesday, as Ike gave prices a lift following a two-month drop that has sent crude down from record highs over $147 a barrel.

"I don't believe there is any possibility we will change production levels," Ecuador's Oil Minister Galo Chiriboga told reporters on Sunday.

Some ministers argued that the market was amply supplied following months of overproduction led by Saudi Arabia.

"As a first step we need some discipline, some members are producing above their commitment," Iran's OPEC governor Mohammad Ali Khatibi told Reuters.

"Any members who are producing more than their commitment must come back to their commitment."