April 27, 2009 / 12:31 AM / in 10 years

Oil falls as flu threatens air travel

NEW YORK (Reuters) - Oil prices fell 2.7 percent on Monday on worries a flu outbreak that started in Mexico could become a global pandemic, hurting the world economy and air travel.

An attendant holds a petrol nozzle at a petrol pump in the northeastern Indian city of Siliguri August 5, 2008. REUTERS/Rupak De Chowdhuri

U.S. oil futures dropped $1.41 to settle at $50.14 a barrel, off an earlier low of $48.01. London Brent crude fell $1.35 to $50.32 a barrel.

Governments around the world rushed on Monday to reduce the impact of a flu outbreak from a virus that has killed 103 people in Mexico and spread to the United States, Canada and Europe.

“The Mexican situation is resurrecting fears of the chilling impact that the SARS epidemic had on economic growth,” said Edward Meir of broker MF Global in a research note.

The World Bank estimated in 2008 that a flu pandemic could cost $3 trillion and result in a nearly 5 percent drop in world gross domestic product.

“The potential for a drop in jet fuel demand is also weighing on oil markets,” Addison Armstrong, an analyst at Tradition Energy, said in a research note.

Airline shares also slumped on expectations the flu outbreak could slow air travel.

Gains in the dollar, a safe haven in times of stress, also weighed on oil and other commodities which tend to fall when the U.S. currency rises.

TACTICAL SHORTS

Oil is down about $100 a barrel from a record peak in July last year of more than $147.

The global recession and sliding oil demand pushed prices toward $30 a barrel earlier this year. They have recovered to around $50 alongside an equity market rally.

“Commodity prices and returns have risen substantially since mid-February lows,” Goldman Sachs said in a research note. “We believe markets will likely continue to pull back from current levels in the near term, as fundamentals are not yet stable enough to support higher prices,” the bank said.

“As a result, we have opened tactical shorts in both the oil and metals markets in recent days.”

The Organization of the Petroleum Exporting Countries has agreed to cut supply by 4.2 million barrels per day since September last year to try to prop up prices.

OPEC meets next on May 28.

Gulf oil producers said on Sunday they could tolerate moderate crude prices for longer to help revive global growth but shared a concern with consumer nations that a prolonged period of low prices could sow the seeds of a future fuel price spike.

Reporting by Richard Valdmanis, Robert Gibbons, Gene Ramos, and Matthew Robinson in New York and Fayen Wong in Perth; Editing by Christian Wiessner

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