Oil plunges below $93 on credit fears

September 16, 2008 9:00:00 AM PDT
Oil prices extended their steep losses Tuesday, tumbling below $93 a barrel as a worsening economy suggested U.S. energy demand will keep falling despite crude's return to year-ago levels.As conditions on Wall Street deteriorated, evidence mounted that U.S. consumers and businesses were bracing for a protracted economic downturn that should guarantee more of the money-saving energy conservation measures of the past year: Americans will cut back on driving, airlines will keep fewer planes in the air and U.S. manufacturers will be shipping fewer products.

"The economic slowdown is completely unavoidable now and people will be driving less, trucking less and buying less," said James Cordier, president of Tampa, Fla.-based trading firms Liberty Trading Group and OptionSellers.com. "Energy consumption will fall dramatically."

Light, sweet crude for October delivery fell $3.05 to $92.66 a barrel on the New York Mercantile Exchange, after earlier dipping to $90.55, its lowest level since Feb. 8. On Monday, prices closed below $100 for the first time in six months, shedding more than $5 and wiping out all of oil's gains for the year.

Crude has fallen $55 - or 37 percent - since shooting above $147 on July 11.

Oil's steep correction comes as traders closely watched rapidly unfolding events on Wall Street. Fears mounted Tuesday about the health of insurance giant American International Group Inc. after several ratings agencies reduced their ratings on the company. That amplified worries of more turmoil a day after Lehman Brothers Holdings Inc. filed for bankruptcy and Merrill Lynch & Co. was bought by Bank of America Corp. in a rush sale intended to save the troubled company.

Analysts say another big round of commodities liquidation may be in the offing as Lehman, a major player in commodities, moves to unwind its positions to raise capital. Others big banks, institutional investors and hedge funds may follow suit on worries that the downward momentum on oil and other commodities may have reached a tipping point where prices will not rebound.

"It's like a snowball effect," said Cordier. "The unwinding of all this debt is getting oil prices to go to these levels much quicker than people thought possible."

But analysts said the biggest weight on oil prices was the slumping economy and continuing demand destruction. On Tuesday, computer maker Dell Inc. said it sees "further softening" in demand for information technology products around the world. That means the company will likely be shipping less products around the globe, further reducing demand for fuel.

Crude fell despite an attack by militants on an oil-pumping station operated by the local unit of Royal Dutch Shell PLC in southern Nigeria with dynamite and other explosives Monday which killed at least one guard in the third day of heavy battles between the armed forces and militants fighters.

Shell said one guard died and four others suffered injuries in the battle, which prompted an evacuation of some facilities in the southern region. No details were given about any effect on oil production.

The Movement for the Emancipation of the Niger Delta, the region's main militant group, claimed responsibility for the attack. Since it emerged nearly three years ago, the group has mostly focused on hobbling Nigeria's oil industry, bombing pipelines in hopes of forcing the federal government to send more revenues to the impoverished oil-producing south.

"When you start to see the market not paying attention to what's going on around it, the fundamentals are not being closely looked at," said Jonathan Kornafel, Asia director for market maker Hudson Capital Energy in Singapore.

In other Nymex trading, heating oil futures fell 7.33 cents to $2.7179 a gallon, while gasoline prices dropped 8.36 cents to $2.4778 a gallon. Natural gas for October delivery fell 18.9 cents to $7.185 per 1,000 cubic feet.

In London, October Brent crude fell $2.95 to $91.29 a barrel on the ICE Futures exchange.