Oil Falls Sharply on Renewed Economic Fears

Source The New York Times

Oil prices slumped below $100 a barrel on Monday as the House of Representatives voted down a $700 billion bailout plan for the financial markets, raising the prospect of slower economic growth and depressed demand for petroleum products. The House leadership, however, plans a second attempt to pass the bill later this week.

Crude oil futures fell $10.52 to settle at $96.37 a barrel on the New York Mercantile Exchange. After an erratic and confused week, oil prices have lost nearly $25 since Sept. 22.

Commodity markets have been shaken by the turmoil on Wall Street while still recovering from two powerful hurricanes in the Gulf of Mexico. After reaching $145.29 a barrel in July, prices slumped to nearly $90 a barrel this month as the nation’s economic prospects dimmed. But in a wild market, they spiked back up last week because of deep uncertainty in the financial markets.

But anxiety once again gripped investors on Monday after a stunning failure of the House to pass the compromise bailout agreement drafted over the weekend. The plan, the biggest bailout in history, would have allowed the Treasury Department to buy back troubled assets held by banks and other financial institutions. It was unclear when the House would schedule a new vote on the bailout, or whether it would pass.

Before the vote, investors were also reminded that the financial crisis was far from over. In the latest episode, the government said Monday that Citigroup would buy the banking operations of the Wachovia Corporation. Meanwhile, the Belgian, Dutch and Luxembourg governments partially nationalized the European financial conglomerate Fortis, another sign that the crisis instigated by soured home mortgages in the United States could be spreading.

As the economic situation deteriorated, the demand for commodities, including oil, was expected to slow.

“The outlook for global equity, interest rate and exchange rate markets has become increasingly uncertain,” analysts at Deutsche Bank wrote in a note to investors. “We believe commodities will be unable to escape the contagion. From a commodity perspective our most pressing concern is to what extent the U.S. virus spreads globally and specifically to China.”

The bank’s analysts pared their expectations for next year as oil consumption falls because of slowing economic growth, reducing their oil and gas price forecasts by about 20 percent for 2009.

Concerns that the crisis might be spreading to Europe helped push down the value of the European common currency. The euro dropped against the dollar to $1.43 on Monday, from $1.46 on Friday.

Experts say that it is becoming increasingly likely that the turmoil will spread to developing countries, like China, which have long sustained high oil prices even as developed economies weakened.

“Things have changed mightily in a very short time, and this crisis has engulfed all markets,” said John Kilduff, senior vice president for risk management at MF Global in New York. “It is harder to envisage a scenario where China can go it alone when the rest of the world plummets economically.”

The darkening economic outlook could further push down oil prices in the coming months if demand for oil in developed countries were also to keep falling, according to Ben Dell, an analyst at Bernstein Research. He said oil consumption could fall by 1.3 million barrels a day, or 2.6 percent, in the fourth quarter this year. That is much more than the drop of 470,000 barrels a day forecast by the International Energy Agency.

“This dynamic is similar to that of the 1980s and suggests that investors should be increasingly concerned with the slowdown in Europe, Japan and the U.S.,” he wrote in a note to clients.