Oil falls to near $88 on profit-taking

Oil prices eased to around $88 a barrel on Wednesday as traders locked in profits after crude rose above $90 for the first time in more than two years.

By early afternoon in Europe, benchmark oil for January delivery was down 65 cents to $88.04 a barrel in electronic trading on the New York Mercantile Exchange.

The contract hit $90.76 on Tuesday, the highest price since Oct. 8, 2008 before pulling back to settle at $88.69, down 69 cents.

The pull back is not surprising, said Victor Shum, an energy analyst at consultancy Purvin & Gertz in Singapore. “It is primarily profit-taking after crude breached the $90 level in New York.”

The rally Tuesday came as President Obama and Republican leaders hammered out an agreement to extend Bush-era tax cuts. A cold snap also swept through Europe and the U.S., lifting demand for fuel.

Some analysts now predict that oil will hit $100 per barrel sometime next year. They point to rising demand from China and other emerging economies. OPEC countries can crank up production to meet that demand now, but their ability to do that is expected to decline over the next few years.

Shum, however, said the $90 level wasn’t sustainable for now amid persistent concerns about the spread of Europe’s debt crisis to Portugal and Spain. This boosts the dollar and depresses the oil price as it makes the commodity more expensive for investors holding other currencies.

On Wednesday, the euro slipped to $1.3230 from $1.3284 late Tuesday in New York.

Fears that China may raise interest rates are also dampening the oil market, which is likely to trade between $85 and $90 in the near term, Shum said.

Traders will seek more clues on the strength of crude demand from U.S. government supply figures later Wednesday. The American Petroleum Institute’s report Tuesday was mixed, showing a drawdown in crude oil stocks but a rise in distillate and gasoline inventories.

The market also will be watching an extraordinary meeting in Ecuador this weekend of OPEC, the organization of the world’s largest oil exporters.

“While a change in production policy is not generally expected, OPEC could decide on measures to dampen prices should the price stray too far from its implicit upper limit of $90,” said analysts at Commerzbank in Frankfurt, Germany. “This speculation should prevent a further price rise for the time being.”

In other Nymex trading in January contracts, heating oil fell 1.47 cents to $2.4555 a gallon, gasoline futures gave up 2.34 cents to $2.2996 a gallon and natural gas rose 4.7 cents to $4.44 per 1,000 cubic feet.

In London, Brent crude was down 51 cents to $90.88 a barrel on the ICE Futures exchange.