Oil prices plunge on concerns that the crisis facing Bear...

Oil prices plunge on concerns that the crisis facing Bear Stearns will widen
John Wilen, THE ASSOCIATED PRESS

NEW YORK - Oil prices fell sharply Monday, pulling back at least temporarily from record levels as investors feared that the financial crisis that forced the sale of Bear Stearns Cos. is a sign of deep U.S. economic troubles.

Crude's plunge came even as diesel prices rose to a new record above US$4 a gallon, and gas prices remained high. Diesel, used to transport the vast majority of goods worldwide, rose 1.3 cents to a U.S. average of $4.002 a gallon Monday, according to AAA and the Oil Price Information Service. The U.S. average price of a gallon of gas, meanwhile, dipped slightly to $3.283 a gallon, but remains 73 cents higher than a year ago.

Oil's steep decline - falling $4.17 to $106.04 a barrel on the New York Mercantile Exchange - came hours after futures rose to a new trading high of $111.80 on the Federal Reserve's surprise Sunday move to lower a key interest rate by a quarter point. In the past several months, Fed rate cuts have fuelled rallies in oil prices.

Crude futures offer a hedge against a falling U.S. dollar, and oil futures bought and sold in dollars are more attractive to foreign investors when the dollar is weak. Interest rate cuts, and even the prospect of future cuts, tend to weaken the dollar further.

But the mass selling Monday - despite the Fed's Sunday rate cut, the prospect of another cut at the Fed's regular Tuesday meeting, and the fact that the dollar dropped to new lows against the euro on Monday - could be a sign that the oil market's momentum has turned negative, analysts say.

"People are saying, well, things are a lot worse than we thought," said Phil Flynn, an analyst at Alaron Trading Corp. in Chicago.

JPMorgan on Sunday agreed to bail out Bear Stearns by buying the investment bank in a Fed-backed deal worth $236.2 million. While Bear shares closed at $30 a share on Friday, JP Morgan will pay only $2 per share.

Investors received more bad news about the U.S. economy when the Fed released data Monday morning that showed the country's industrial output dropped by 0.5 per cent in February, the biggest decline since October. Analysts had expected an increase of 0.1 per cent.

Since oil moved above $100 a barrel last month, a growing chorus of analysts have argued that oil prices are in a bubble. Several forecasters have lowered demand growth predictions for this year, while supplies have grown.

"Oil market fundamentals do not support prices at these levels," said Addison Armstrong, director of exchange traded markets at TFS Energy Futures LLC in Stamford, Conn., in a research note.

But it remains unclear whether Monday's price plunge marks the beginning of a longer decline, or a brief profit-taking retrenchment. If prices do fall, gas and diesel prices could follow. Still, consumers should expect to pay more at the pump this spring and summer: The Energy Department expects gas prices to rise to about $3.50 a gallon, while many analysts say prices could peak between $3.75 and $4.

Diesel's surge is hurting truckers particularly hard, said Bill Graves, chief executive of the American Trucking Association.

"There is little to suggest that fuel prices will decline any time soon," Graves said in a statement. "Escalating fuel prices are hurting (truckers') businesses and affecting their livelihood."

Other energy futures also fell steeply Monday. April heating oil futures dropped 6.8 cents to $3.0785 a gallon while April gasoline futures fell 9.84 cents to $2.591 a gallon. Natural gas prices dropped 22.3 cents to $9.645 per 1,000 cubic feet.

In London, Brent crude futures fell $2.85 to $103.35 a barrel on the ICE futures exchange.


© The Canadian Press, 2008 ... AOI not thinking short term..it is firmly in an uptrend..RRS,RRL will follow