Potential for Reversal

"Oil prices have resumed their rapid downhill trajectory and the dollar is again showing signs of strength -- shifts with potential to affect everything from stock-market sentiment to OPEC strategy and central bank policy. Benchmark crude prices fell nearly $6 a barrel Tuesday to close at $109.71 -- their lowest level in five months, after hitting an intraday low of $105.46, MarketWatch reports. In Asian trading this morning, oil futures fell a further $2 a barrel.

Now that Hurricane Gustav passed through the Gulf of Mexico without laying waste to oil facilities there, worries about supply disruptions have eased and some analysts expect oil prices to fall further, possibly below $100 a barrel -- a level not seen since March, the Financial Times writes. "With the fear of Gustav now gone, a downside 'speed bump' will have effectively been removed as far as crude-oil prices are concerned, and we expect values to start tracking lower once again," Edward Meir of MF Global in New York tells the FT.

"Commodities are softening on any hint of bearish news and shrugging off most bullish news -- suggesting a significant shift in sentiment away from the sector and leaving many traders wondering what the floor will be," The Wall Street Journal writes. Lower prices could offer some relief to businesses and consumers either directly or through lower interest rates, which are kept high by inflation concerns, the paper notes, adding that lower commodity prices ease those concerns somewhat. Among companies that stand to benefit directly from the slide in oil prices are airlines, which have been hit hard by high fuel prices. Yesterday, the drop in fuel costs was reflected in their share prices, as Continental rose 9%, United Airlines shares were up 10%, and Delta picked up 12%, the New York Times notes.

But there is potential for this new trend to reverse if, for example, the global economy is shown not to be slowing as much as anticipated, thus changing expectations for demand to weaken, the Journal notes. Another factor that must be taken into account is OPEC. Iran is lobbying fellow members to cut crude output to boost prices when the cartel meets in Vienna next week, the FT writes. However, it's not clear the Saudis will agree with Iran's position, as the kingdom boosted production to more than 9.5 million barrels a day in July, the highest level in more than 25 years, after pressure from consumers, particularly in the U.S., the paper adds.

The drop in oil prices has come in tandem with strengthening of the dollar, which is lately bolstered by growing pessimism over the economic health of the EU and the U.K. (Oil is priced in dollars, so a move by one typically spurs the other to move in the opposite direction. And the Journal notes that more bad news from a big bank, which would likely hurt the dollar, could also reverse the downward trend of oil prices.) The greenback reached an 11-month high against a basket of major currencies today as investors dumped instruments like the euro, the pound and Australian dollar, Reuters reports. The euro eased to $1.4434; sterling fell to $1.7715, near a two-year low; and the Australian dollar sank to $0.8251, a day after that country's central bank cut interest rates for the first time in seven years.

The pound has been on a sharp decline recently, falling around 9% in August against the dollar and the yen, the BBC notes. Slowing economic growth and an increasingly gloomy outlook from the Bank of England and the U.K. government have added pressure on the central bank to lower interest rates, the BBC adds, and the BOE could exacerbate that situation further as soon as tomorrow. "Some are speculating that the Bank of England might perhaps deliver a surprise rate cut [Thursday]," Mitsubishi UFJ Trust and Banking chief foreign exchange manager Hideaki Inoue tells Dow Jones Newswires."