Oil futures fell Friday as a late flurry of selling overcame an earlier rally driven by the steadily weakening dollar.
Early in the day, crude prices rose to near record levels as the dollar's drop against other currencies sparked buying by investment funds. But in the midst of that rally, analysts noted that oil's fundamentals are weak. Many believe it's only a matter of time before oil begins a seasonal price decline.
U.S. light, sweet crude for November delivery fell $1.22 to settle at $81.66 a barrel on the Nymex, giving back nearly half of the $2.58 the contract gained on Thursday. Prices rose as high as $83.76 early in the day.
Oil prices peaked at a record $83.90 last week before retreating below $80 a barrel early this week. When an Energy Department report on Wednesday showed crude inventories rose last week, countering expectations for a decline, prices fell below $79 -- but then rebounded late in the day.
"There's definitely been a flow of fund buying here," said Tim Evans, an analyst at Citigroup in New York.
Oil and other commodities denominated in dollars are actually falling in price in the eyes of foreign investors. That's because the dollar has been sliding against other currencies since the Federal Reserve cut interest rates last week. The dollar fell further on Friday on expectations that the weak U.S. economy means another rate cut is coming.
Buying by foreign investors precipitates new investment by domestic traders betting the added demand will boost prices.
But Evans and other analysts argue that market fundamentals do not support such high prices. Oil inventories are falling, but that's typical for this time of year, Evans said. Oil inventories are 1.3 percent below year-ago levels, but oil's price is more than $20 a barrel higher, he said. And high oil and gas prices are depressing demand, Evans added.
Stephen Schork, an analyst and trader in Villanova, Penn., argued that many funds bought oil futures this week to pad their results for the third quarter, which ends Friday.
"Hedge fund managers...went window shopping in the [New York Mercantile Exchange crude] pit to dress up their end-of-quarter marks," Schork said in his daily Schork Report research note. "We are more interested to see how the fourth quarter begins on Monday rather than how the third quarter ends today."
While Nymex crude rallied late in the week, oil prices ended the week flat, up just 4 cents from last Friday.
Other energy futures have followed oil's advance only sporadically. When oil futures surged Thursday, gasoline and heating oil followed suit, adding more than 6 cents each. On Friday, however, October gasoline fell 2.56 cents to settle at $2.0683 a gallon and heating oil fell 1.42 cents to settle at $2.2379 a gallon.
Gasoline futures fell 4.62 cents, or 2.2 percent, this week. Heating oil and gasoline futures expired Friday at the end of the Nymex floor session. Inventories of both grew more than expected last week.
Natural gas for November fell 4.9 cents to settle at $6.87 per 1,000 cubic feet. The government reported Thursday that natural gas inventories grew slightly more than expected last week.
In London, November Brent crude fell 86 cents to settle at $79.17 a barrel on the ICE Futures exchange.
At the pump, meanwhile, the average national price of a gallon of gas fell 0.6 cent overnight to $2.805 a gallon, according to AAA and the Oil Price Information Service. Analysts have been predicting gas prices will add 10 to 15 cents a gallon to catch up to the increase in oil prices, but so far the increases have been slight. Retail gasoline prices are only 0.8 cent higher than they were a week ago.