Oil Closes Near $131 on Strong Dollar, Output Boost

Oil fell sharply on Tuesday after the U.S. Federal Reserve signaled it was taking aim at inflation, triggering a rebound in the U.S. dollar and a sell-off across commodities markets.

Further pressure on prices came after two of the world's biggest energy forecasters lowered their outlook for global energy demand as high prices bite consumers, easing the effect of lackluster increases in world production.

U.S. crude dropped $3.04, or 2.26 percent, to settle at $131.31 a barrel, well below last Friday's record near $140.

London Brent crude fell $2.89 to $131.02.

"Crude is down basically as the dollar is taking off after Bernanke's remarks, which sparked some profit-taking," said Phil Flynn at Alaron Trading in Chicago.

Fed Chairman Ben Bernanke said on Tuesday the central bank would "strongly resist" inflation, cementing views that interest rates will rise later this year.

Oil and other commodities have surged to record heights in recent months as investors piled money into the markets as a hedge against the weak dollar and inflation.

Despite Tuesday's losses, oil prices are up more than sixfold since 2002 in a rally that has pressured the economies of major consumer nations like the United States, already reeling from a housing crisis and credit crunch.

OPEC kingpin Saudi Arabia will host a meeting of oil producers and consumers on June 22 to discuss high oil prices, the group's Secretary General said on Tuesday.

The Organization of the Petroleum Exporting Countries has repeatedly declined calls for more output from consumer nations, saying high prices have nothing to do with a shortage of supply.

"We are panicking too much," OPEC Secretary General Abdullah al-Badri told the Reuters Global Energy Summit.

"I want to say, there is no shortage now and in the future." Demand Destruction Dealers said oil's losses mounted during the session as an International Energy Agency report revised 2008 global energy demand down more than 200,000 barrels per day as Asian economies move to roll back fuel subsidies.

The U.S. Energy Information Administration, in a separate report on Tuesday, also cut its forecast for world demand growth by about 200,000 barrels per day, with consumption in the United States shrinking dramatically.

"U.S. consumption of liquid fuels and other petroleum is expected to decline by about 290,000 bpd in 2008 because of higher petroleum product prices and slower economic growth," the EIA said in its report.

Despite flagging demand, analysts remained concerned that world production may continue to fall short.

"It's a tricky situation because supply is falling as fast as demand is," said Francisco Blanch of Merrill Lynch.

The IEA cut its expectations for supply growth from countries outside OPEC to 460,000 bpd from 680,000 bpd, while the EIA said cut its forecast for non-OPEC output growth to 310,000 bpd from 600,000 bpd.

The head of Brazilian oil company Petrobras said on Tuesday that he expected oil prices to keep rising over the next five years as producers face limitations on boosting output to meet rising Asian demand.

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