Oil prices rebound on AIG bailout, weaker dollar

[September 18, 2008]  NEW YORK (AP) -- Oil prices rebounded Wednesday as a government rescue of American International Group Inc. soothed skittish investors who feared the insurer's collapse could have triggered a wholesale exodus from commodities.

 Light, sweet crude for October delivery rose $2.35 to $93.50 a barrel in early trading on the New York Mercantile Exchange, halting a steep two-day slide. Still, recent rallies often have been followed by sharp selloffs as oil market traders try to wring whatever money they can out of the quickly deflating oil bubble.

Meanwhile at the pump, retail gas prices were virtually flat compared with the previous day as more Gulf Coast refineries began ramping up operations after the passage of Hurricane Ike. A gallon of regular inched up one-tenth of a penny to a new national average of $3.855, according to auto club AAA, the Oil Price Information Service and Wright Express.

Some recovery in crude was expected after the contract dropped $10 in the previous two sessions, bringing prices to their lowest level in seven months and down 8 percent for the year. Oil has fallen about $55 -- or 36 percent -- since hitting a record $147.27 on July 11.

Wednesday's oil gain was energized by the bailout of AIG. The Federal Reserve on Tuesday agreed to pump $85 million in taxpayer money into the insurance giant in return for a 79.9 percent ownership stake. The lifeline was aimed at avoiding an AIG collapse due to massive losses tied to the subprime mortgage crisis and the credit crunch.

If AIG had been allowed to fail, investors feared the company would move to unwind positions in energy and other commodities to raise cash, setting in motion another big commodities liquidation. Oil's big two-day price drop this week was due in part to similar concerns that surfaced after Lehman Brothers Holdings Inc. filed for bankruptcy Monday.

Hoping to maintain order in commodities markets, CME Group Inc., the largest derivatives exchange, said Wednesday it will allow AIG to execute limited block trades to reduce its open positions.

"The fear was that if AIG was allowed to go down, we could be looking at a huge exit from financial instruments across the spectrum: equities, oil futures, everything," said Jim Ritterbusch, president of energy consultancy Ritterbusch and Associates in Galena, Ill.

A slightly weaker dollar also gave oil prices a boost. A falling greenback encourages investors to shift funds into commodities, which are often bought as safe-haven assets used to hedge against inflation or weakness in the U.S. currency.

But oil market watchers doubted oil would resume its upward climb of earlier this year. Worries about more tumult in financial markets have raised expectations of a long economic downturn that will weaken U.S. demand for crude.

And a host of bullish news -- including OPEC cutting output by 520,000 barrels a day last week and damage to oil installations on the Texas coast by Ike last weekend -- has passed virtually unnoticed by oil markets.

"The OPEC cut didn't have any impact," said Peter McGuire, managing director at investment firm Commodity Warrants Australia in Sydney. "Then Ike didn't slow the market either."

Also Wednesday, the U.S. government reported a bigger-than-expected drop in crude supplies, reflecting the shutdown of virtually all Gulf Coast oil production because of Ike and Hurricane Gustav.

The Energy Information Administration said U.S. crude stocks fell by 6.3 million barrels for the week ending Sept. 12, much bigger than the 3.7 million barrel drop expected by analysts surveyed by energy research firm Platts expected.

Gasoline inventories fell by 3.3 million barrels to 184.6 million barrels. Analysts expected stockpiles of the motor fuel to fall by 3.6 million barrels.

Inventories of distillate fuel, which include diesel and heating oil, fell by 900,000 barrels to 129.6 million barrels for the week ended Sept. 12. Analysts expected distillate stocks to slip by 1.7 million barrels.

Meanwhile, more violence across Nigeria's restive Niger Delta oil region helped support oil prices. Nigeria's main militant group said it destroyed an oil-pumping station and a pipeline that crosses southern Nigeria, extending a spate of violence into a fifth day.

A spokesman for Nigeria's state oil company said militant attacks are now cutting the country's daily oil production by 40 percent.

Investors were also watching for fallout from a Wednesday attack on the U.S. embassy in the capital of Yemen. Attackers armed with automatic weapons, rocket-propelled grenades and at least one suicide car bomb assaulted the embassy, leaving at least 16 people dead, including six assailants. No Americans were hurt.

In other Nymex trading, heating oil futures fell about half a penny to $2.7186 a gallon, while gasoline prices lost 1.88 cents to $2.382 a gallon. Natural gas for October delivery added 40.6 cents to $7.965 per 1,000 cubic feet.

In London, November Brent crude rose $2 to $91.22 a barrel on the ICE Futures exchange.

[Associated Press; By STEVENSON JACOBS]

Associated Press writers Louise Watt in London and Alex Kennedy contributed to this report from Singapore.

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