Tuesday, September 23, 2008

Oil pulls back as Congress mulls bailout

Oil prices fell Tuesday as investors wait for more developments concerning the government's proposed $700 billion bailout plan and the day after a record one-day surge. Oil slipped $2.15 to $107.22 a barrel, after having traded as low as $106.07. The November contract, which as of Tuesday became the front-month contract, settled up $6.62 to $109.37 on Monday. $700 billion bailout: On Saturday, President Bush asked Congress for the authority to spend as much as $700 billion to purchase toxic mortgage debt from already struggling financial institutions in an effort to prevent the credit crisis from crippling an already beleaguered Wall Street. Investors had hoped that the bailout plan would put the nation's economy on the fast track to recovery, helping demand for energy tick higher as well. However, the unprecedented scope of the plan in combination with a lack of details as to how the plan will actually work left the stock market anxious on Monday, and the Dow ended the day 373 points lower. The oil market was hesitant on Tuesday as well, waiting for further information. "There is still some fear about the bailout package because it is still in the hands of Congress," said Tom Orr, director of research at Weeden & Co., financial services firm. "People are worried that there will have to be compromising to be made and there will be delays." "Time is a problem. Time is not on your side. It needs to be expeditious," added Orr. "Every day there is a delay, there is the risk that some other landmine goes off. People need the comfort to know that this package is in place." Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke both said Tuesday that the measures outlined for the bailout were urgently necessary. One analyst said that if the Congress does actually pass the bailout, it would likely push oil prices higher very quickly. The bailout "may get the motor running but because of the influx of so much money. They are adding liquidity to the system to the tune of $700 billion," said Mark Waggoner , president of Excel Futures. But, "adding that much liquidity to the market essentially dilutes the dollar - makes the value lower," said Waggoner. And because crude oil is traded in U.S. currency globally, a weaker dollar pushed crude prices sharply higher. The oil market was waiting to hear from Congress about the fate of the $700 bailout plan. After the spike: The November contract's substantial $6 gain on Monday was overshadowed by the historic $16 surge in the October contract. Monday was the last day that the October contract was the front-month contract, and oil posted the largest one-day gain in dollar terms ever, settling up $16.37 at $120.92 a barrel. Oil had risen as much as $25 to touch $130 a barrel. The late-session spike was due to investors having to make good on their orders before the October contract expired. The $6.62 increase in the November contract Monday would be considered a substantial move, except for its comparison with the unprecedented move in the October contract. "The market is resetting itself," said Orr, of the moderate trading on Tuesday. The spike in price on Monday "was completely aberrational. It was not indicative of what was going on in the market - it was only indicative of what was going on with the front month contract," said Orr. "People waited until the last half hour of the day and there were absolutely no sellers," said Orr. "You don't have any market makers since Wall Street is in such disarray." In response to the unprecedented run-up in oil futures, the Commodity Futures Trading Commission (CFTC) said in a statement that it was investigating the situation to be sure that there was no mishandling of the oil trade. "No one should be trying to game our nation's commodity futures markets," said CFTC Acting Chairman Walter Lukken in a written statement. Supply concerns: Lower oil prices defied several ongoing supply disruptions, which would normally cause oil prices to rally. Violence in oil-rich Nigeria has been limiting crude supplies out of the country. The Movement for the Emancipation of the Niger Delta (MEND) has been attacking oil pipelines in retaliation against government forces, limiting the amount of crude oil that can leave the country. In addition, the Gulf of Mexico was still struggling to regain footing after Hurricanes Gustav and Ike shook the oil production and refinery-rich region. According to the most recent situation report from the Department of Energy, 89.2% of oil production in the region remained shut in and 75.4% of natural gas production was still shuttered. With refineries in Texas still shut down, nearly 2.3 million barrels per day less oil have been processed in the region, according to the DOE. Russian warships have sailed for Venezuela, and that would also typically support oil prices, according to Waggoner. After the Russia-Georgia conflict last month, two Russian bombers were deployed to Venezuela as tensions with the United States mounted. Both Venezuela and Russia have large supplies of oil. According to Waggoner, the oil market will also be keeping an eye on the area in the Atlantic Ocean which the National Hurricane Center reports "has the potential to become a tropical depression at any time."

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