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Monday, October 6, 2008

Oil falls below US$92 as financial turmoil spreads(updated)

SINGAPORE: Oil prices fell below US$92 a barrel on Monday in Asia on fears a U.S.-led financial crisis is spreading across the globe, exacerbating an economic slowdown that will cut crude demand.

Light, sweet crude for November delivery was down US$1.96 to US$91.92 a barrel in electronic trading on the New York Mercantile Exchange by midday in Singapore.

Earlier, it fell as low as US$91.60. On Friday, the contract dipped 9 cents settle at US$93.88 a barrel.

Worries that the crisis is enveloping Europe intensified after Germany announced Sunday a new bailout package totaling 50 billion euros (US$69 billion) for Hypo Real Estate, the country's second-biggest commercial property lender.

The move is part of a scramble by European governments to save failing banks.

"What happened over the weekend was further evidence of the spread of this financial crisis to Europe,'' said Victor Shum, an energy analyst with Purvin & Gertz in Singapore.

"This further deepens the sentiment that we're going to see a more widespread economic slowdown or even recession, and that's no good for oil demand.''

Investors shrugged off Friday's approval by the U.S. House of Representatives of a US$700 billion bailout package to buy bad mortgage debt, aimed at stabilizing the U.S. financial system.

Oil demand in the world's richest countries had already begun to slow since May, before the worst of the financial turmoil hit the United States last month, Shum said.

"The rescue plan should keep a complete financial meltdown from occuring,'' Shum said.

"But the demand data is not encouraging. In the developed countries it's falling, and that's why we're seeing downward pressure on prices.''

Traders were digesting a series of developments out of Europe.

On Sunday, Belgian Prime Minister Yves Leterme said that France's BNP Paribas SA had committed to taking a 75-percent stake in Fortis NV.

British treasury chief Alistair Darling said he was ready to take "pretty big steps that we wouldn't take in ordinary times'' to help the country weather the credit crunch.

And in Iceland - particularly hard-hit by the credit crunch - government officials and banking chiefs were discussing a possible rescue plan for the country's overstretched commercial banks.

Investors will be watching if the Organization of Petroleum Exporting Countries moves to cut output should prices fall further.

"OPEC has signaled it may defend US$80,'' Shum said.

"There's uncertainty over what OPEC may do.''

Traders were also watching currency movements as investors tend to buy commodities like oil to defend against dollar weakness and a hedge against inflation, but sell crude as the U.S. currency strengthens.

The 15-nation euro fell to US$1.3608 in trading Monday from 1.3774 late Friday while the dollar dropped to 102.88 yen from 105.30 on Friday.

In other Nymex trading, heating oil futures fell 3.89 cents to US$2.62 a gallon, while gasoline prices dropped 3.43 cents to US$2.19 a gallon.

Natural gas for November delivery fell 14.2 cents to US$7.21 per 1,000 cubic feet.

In London, November Brent crude fell US$1.90 to US$88.35 a barrel on the ICE Futures exchange.

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