Oil prices plummet $7 on spreading economic fears

[bhdean]

NEW YORK - Oil prices plunged Tuesday as worries about the nation's economic health shot to the fore and OPEC warned that high pump prices are likely to erode global demand for crude.
Prices at one point dropped more than $10 a barrel from the day's high. By early afternoon, light, sweet crude was down $6.90 to $138.28 in an extremely volatile session.
The turnaround may not signal a lasting shift in sentiment — prices have swung violently in recent days as they flirted with record highs. But it does underscore investor uncertainty about the sustainability of sky-high prices and potentially long-lasting effects on the broader economy.
"They're slamming this pretty good. But remember, these (big) moves are becoming a little more commonplace," said Phil Flynn, analyst at Alaron Trading Corp. in Chicago.
Earlier, the contract rose as high as $146.73 and fell as low as $135.92. Prices hit a record $147.27 Friday.
Mounting worries about the health of the U.S. economy helped spur the sell-off.
Federal Reserve Chairman Ben Bernanke told Congress that "numerous difficulties" are racking the economy of the world's largest oil consumer, and warned that rising prices for energy and food are elevating the risks of inflation.
At the same time, the Labor Department reported that wholesale inflation jumped by 1.8 percent last month, a larger-than-expected gain. Over the past year, wholesale prices have risen 9.2 percent, the most since 1981.
Jim Ritterbusch, president of energy consultancy Ritterbusch and Associates, said economic worries likely contributed to Tuesday's declines.
"Traders get spooked and simply sell positions," he said. "The threat of recession, at some point the market's going to plug that in."
Bernanke's sobering comments helped drive stocks down sharply, although they later recovered as oil prices fell.
Lingering concerns about the health of the financial sector continued to weigh on banking stocks, however, reminding energy traders that oil prices are not immune to troubles elsewhere in the economy.
"Since investment banks have been increasing their ... exposure to commodities, their current distress can have (a) significant impact on oil prices if they are forced to liquidate commodity positions in a run for cash," Olivier Jakob, an analyst at Petromatrix in Switzerland, said in a research note.
The latest monthly market report from the Organization of Petroleum Exporting Countries gave traders further reason to unload oil.
The cartel predicted world oil demand will rise by 900,000 barrels a day in 2009, or 100,000 barrels per day less than this year. OPEC blamed the slowdown on a slumping economy and high pump prices in richer industrialized countries.
Meanwhile, a five-day strike by Brazilian oil workers that began early Monday had less effect on output than feared. The labor action cut production of government-run Petroleo Brasileiro SA, or Petrobras, by only about 4 percent by Monday evening. Petrobras produces about 1.6 million barrels of oil a day.
"We are not making a big case of the strike in Brazil as it is well defined in time, hence carries little un-priced risk. Furthermore the output loss estimates have been continuously revised down," Jakob said.

The dollar fell to a new low against the euro, but that did little to halt oil's fall. A weaker dollar has been a major factor driving prices sharply higher in recent months, enticing investors to pump money into oil as a hedge against inflation and making crude cheaper for overseas buyers.
In Washington, President Bush continued to press the Democratic-run Congress to open up new areas to offshore oil drilling. The president lifted a ban on Continental Shelf drilling Monday, but a Congressional prohibition remains.
"I readily concede it won't produce a barrel of oil tomorrow, but it will reverse the psychology," Bush said at his first White House news conference since April.
At the fuel pump, retail gas prices in the U.S. remained at a record near $4.11 a gallon, according to auto club AAA, the Oil Price Information Service and Wright Express. Diesel rose six-tenths of a penny to its own high of $4.83 a gallon.
General Motors Corp., the leading U.S. automaker, said it is assuming oil prices will hover between $130 to $150 a barrel next year. The company made the prediction as it laid out plans to slash jobs and truck production, suspend its dividend and borrow up to $3 billion as it grapples with an ailing U.S. economy and record high fuel prices.
In other Nymex trading, heating oil futures fell more than 16 cents to $3.9035 a gallon, while gasoline futures tumbled more than 20 cents to $3.3543 a gallon. Natural gas dropped almost 56 cents to $11.34 per 1,000 cubic feet. In London, August Brent crude fell $6.33 to $137.59 a barrel on the ICE Futures exchange.

[jjvman]

Could gasoline drop under $4.00 again? I remember putting $4.00 worth in the Bug for the week. God post bh.

[conlor]

I saw gas for $4.25 on the way home from work today. That's about 20 cents more than it was during the weekend. The most I'd seen before was $4.15.

[Woodmonkey]

I have a feeling that, if the oil prices continue to go down, we won't see any relief at the pump!

[bhdean]

I think the gas companies will keep the pump price up so the can make some more of those outrageous profits.

[Woodmonkey]

I read that they make 8% profit and the government over 15% on the taxes that are on each gallon + billions in taxes paid by the oil companies. Who's the worst bandit here?