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Tuesday, 7 October 2008

Oil falls below $90 as financial turmoil spreads

SINGAPORE: Oil prices fell to an 8-month low below $90 a barrel on speculation that the spreading financial crisis will exacerbate a global economic slowdown and cut demand for crude oil.

Light, sweet crude for November delivery was down $4.69 to $89.19 a barrel in electronic trading on the New York Mercantile Exchange by late afternoon in Singapore.

Oil prices have tumbled nearly 40 percent since peaking in July. The Nymex front-month contract last traded this low in early February.

The drop came as world stock markets plunged amid growing investor anxiety that the U.S. bad debt crisis is enveloping Europe. Germany announced Sunday a bailout package totaling 50 billion euros ($69 billion) for Hypo Real Estate, the country's second-biggest commercial property lender, part of a scramble by European governments to save failing banks.

"What happened over the weekend was further evidence of the spread of this financial crisis to Europe," said Victor Shum, an energy analyst with Purvin & Gertz in Singapore. "This deepens the sentiment that we're going to see a more widespread economic slowdown or even recession, and that's no good for oil demand."

Investors shrugged off Friday's approval by the U.S. House of Representatives of a $700 billion bailout package to buy bad mortgage debt, aimed at stabilizing the U.S. financial system.

Oil demand in the world's richest countries had already begun to slow since May, before the worst of the financial turmoil hit the United States last month, Shum said.

"The rescue plan should keep a complete financial meltdown from occuring," Shum said. "But the demand data is not encouraging. In the developed countries it's falling, and that's why we're seeing downward pressure on prices."

In other signs the meltdown is spreading, Belgian Prime Minister Yves Leterme said Sunday that France's BNP Paribas SA had committed to taking a 75-percent stake in troubled European bank Fortis NV. British treasury chief Alistair Darling said he was ready to take "pretty big steps that we wouldn't take in ordinary times" to help the country weather the credit crunch.

Investors will be watching if the Organization of Petroleum Exporting Countries moves to cut output should prices fall further.

Iranian Oil Minister Gholam Hossien Nozari said Saturday that it would be "unsuitable" for both producers and consumers for oil to dip below $100 a barrel. He called on fellow OPEC members not to pump too much oil and avoid a drop in prices.

"OPEC has signaled it may defend $80," Shum said. "There's uncertainty over what OPEC may do."

Traders were also watching currency movements as investors tend to buy commodities like oil to defend against dollar weakness and a hedge against inflation, but sell crude as the U.S. currency strengthens.

The 15-nation euro fell to $1.3590 in trading Monday from 1.3774 late Friday while the dollar dropped to 103.35 yen from 105.30 on Friday.

In other Nymex trading, heating oil futures fell 12.28 cents to $2.5392 a gallon, while gasoline prices dropped 9.83 cents to $2.13 a gallon. Natural gas for November delivery fell 17.2 cents to $7.186 per 1,000 cubic feet.

In London, November Brent crude fell $3.80 to $86.40 a barrel on the ICE Futures exchange.

Source : ET

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