Oil falls on economic slowdown fears

[October 08, 2008]  VIENNA, Austria (AP) -- Investor concerns that the U.S. credit crisis was enveloping the globe and will hurt demand for crude drove oil prices down Wednesday.

For people worldwide worried about the erosion of their investments as stock markets plummet and more and more financial institutions are threatened by meltdown, oil's recent and relative affordability brings a small measure of comfort. Prices have fallen about 40 percent since peaking near US$150 in July.

Light, sweet crude for November delivery was down US$2.47 to US$87.58 a barrel in electronic trading on the New York Mercantile Exchange by midday in Europe. The contract overnight rose $2.25 to settle at $90.06.

A US$700 billion U.S. financial bailout plan approved last Friday has failed to soothe investors worried about a deepening economic malaise. The Dow Jones industrial average fell more than 500 points Tuesday to a five-year low.

The crisis has spread to Europe as well. The British government announced plans Wednesday to partially nationalize its major banks. The Treasury said eight banks have signed up for the so-called recapitalization plan that offers up to 50 billion pounds, or US$87.5 billion in the form of preference shares.

The Reserve Bank of Australia surprised markets Tuesday when it slashed its key rate a full percentage point to 6 percent its biggest cut since 1992.

Asian shares were hammered hard Wednesday, with the Japan's benchmark Nikkei 225 stock average spiraling down nearly 10 percent to a five-year low. Hong Kong's market plunged 8 percent.

"We've got major issues in every corner of the planet," said Peter McGuire, managing director at investment firm Commodity Warrants Australia in Sydney. "The world economy is like a house that's been ravaged by termites."

Investors are watching for signs of slowing U.S. demand in the weekly oil inventories report to be released later Wednesday from the U.S. Energy Department's Energy Information Administration. The petroleum supply report was expected to show that oil stocks fell 1 million barrels, according to the average of analysts' estimates in a survey by energy information provider Platts.

The Platts survey also showed that analysts projected gasoline inventories rose 2 million barrels and distillates went up 1 million barrels last week.

Reflecting lessened demand in the U.S., Vienna's JBC Energy cited MasterCard Advisors latest report, noting drivers had cut back by more than 6 percentage points year on year -- and by 5 percentage points compared to the previous year.

Gasoline prices slipped by over 6 cents in other Nymex trading to just over US2 a gallon, while heating oil futures plunged by more than 8 cents to US$2.425 a gallon. Natural gas for November delivery fell by more than 13 cents to US$6.637 per 1,000 cubic feet.

In London, November Brent crude fell US$2.82 to US$81.84 a barrel on the ICE Futures exchange.

The Organization of Petroleum Exporting Countries may cut production if prices fall further, but the scope of such cuts would be limited by concern higher energy costs would exacerbate the economic slowdown, McGuire said.

"OPEC can only do so much," McGuire said. "We may see interest rates cuts and increased government spending as a way out."

[Associated Press; By GEORGE JAHN]

Associated Press writer Alex Kennedy contributed to this report from Singapore.

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