Oil prices drop again during seesaw day

October 14, 2008 2:21:37 PM PDT
Oil prices fell below $79 a barrel in choppy trading Tuesday as investors took profits from the previous day's rally and shifted their focus back to signs of dwindling world energy demand. A falling U.S. stock market, a day after a record-breaking advance, also weighed on crude prices as oil market traders continued to fixate on equities as a barometer for the overall confidence in the shaky world economy.

At the pump, retail gas price kept dropping. A gallon of regular dropped 4.3 cents overnight to a new national average of $3.163, according to auto club AAA, the Oil Price Information Service and Wright Express. That's a 23 percent slide from the record average of $4.14 reached July 17.

Investors generally have reacted positively to the U.S. government's plan to spend $250 billion to buy stock in banks. Nine major banks will initially participate in the extraordinary measure aimed at unclogging stalled credit markets and restoring confidence in the wider economy. That followed Monday's news that European governments were putting up over $2 trillion to safeguard their own banks.

The Dow Jones industrial average fluctuated for most of the day before ending 76 points lower, a day after soaring to its biggest point gain ever and largest percentage gain since 1933.

Andrew Lebow, senior vice president and broker at MF Global in New York, said "oil is still following equity markets" but noted that fears of a demand-crushing U.S. recession despite a litany of bailout measures is also prompting traders to sell crude.

"On a historical basis, $80 a barrel is still very expensive," Lebow said. "The economy clearly proved that it couldn't handle prices at well above $100, so what's equilibrium price? We have no idea."

Light, sweet crude for November delivery fell $2.56 to settle at $78.63 on the New York Mercantile Exchange after fluctuating between positive and negative territory for most of the day.

The contract rose $3.49 to settle at $81.19 on Monday.

Mike Zarembski, senior commodity analyst at brokerage OptionsXpress Inc. in Chicago, predicted oil would trade in a range of $75 to $85 a barrel in the short term as the globally coordinated financial rescue efforts eases some of the panic among investors.

"We may be seeing the start of some stability. I think the market is kind of tired of all the volatility," said Zarembski. "We'll probably be in wait-and-see mode until we know how all these (bailout) scenarios play out."

Oil fell to a 13-month low Friday, settling at $77.70. Crude is down 44 percent since reaching a peak of $147.17 in mid-July as the credit crisis has steadily eroded the growth outlook for world economies.

To counter any further trouble in the banking sector, the U.S. plans to spend an initial $250 billion of a $700 billion bailout buying stock in private banks.

But analysts say the meltdown in financial markets may have already done its damage to global economic growth.

"The outlook for oil prices is still very much bearish as the risk of global recession - or at least a global slowdown - remains," said Peter Luxton, analyst at Informa in London, who expects prices to drop to the $60 to $70 a barrel region next year.

He said prices may hover around the current levels until mid-November, when the OPEC meeting will be held. OPEC member countries including Iran have called for a production cut to stop the decline in oil prices, but markets are uncertain how effective that will be.

"Demand is driving oil markets now," said Luxton.

He noted OPEC has a poor record of boosting prices with production cuts during economic downturns.

Meanwhile, other analysts are revising down forecasts. Goldman Sachs on Monday cut its year-end crude price forecast from $115 a barrel to $70, while saying prices could fall as low as $50.

In other Nymex trading, heating oil futures fell 8.13 cents to settle at $2.2882 a gallon, while gasoline futures fell 3.28 cents to settle at $1.8848 a gallon. Natural gas futures fell nearly a penny to settle at $7.324 per 1,000 cubic feet.

In London, November Brent crude lost $2.93 to settle at $74.53 a barrel on the ICE Futures exchange.