http://money.cnn.com/2008/07/15/markets/oil/index.htm?postversion...

http://money.cnn.com/2008/07/15/markets/oil/index.htm?postversion=2008071511

FROM CNN.COM

Oil tumbles on financial concerns
Investors fear credit market problems could weigh on consumers and cut into demand for oil.

NEW YORK (CNNMoney.com) -- Oil prices fell more than $8 a barrel Tuesday as investors feared that the nation's financial woes could cut into demand.

Light, sweet crude fell $8.22 to $136.96 a barrel in electronic trading on the New York Mercantile Exchange. Earlier prices dipped more than $9 a barrel to $135.92.

Prices began to fall after Federal Reserve Chairman Ben Bernanke warned that high energy prices have sapped the purchasing power of U.S. households.

"It seemed to pick up steam after President Bush spoke about drilling off shore," said Phil Flynn, senior market analyst with Alaron Trading in Chicago, talking about the president's Tuesday news conference.

The mortgage crisis and high energy costs will remain a drag on the U.S. economy for the rest of the year, Bernanke told the Senate Banking Committee Tuesday.

"How big ultimately is the spillover of the financials into the overall GDP or the demand picture of the U.S.?" asked Peter Beutel, oil analyst with Cameron Hanover.

Inflation: The dollar fell against major currencies, and sank to a record low against the euro overnight Tuesday, weighed down by concerns about the U.S. credit market.

The weakened dollar has been blamed for much of crude's runup, as investors buy oil and other commodities to hedge against inflation. But that behavior may be changing for oil as many begin to see it weighing on demand.

There's "definitely a reverse of what the rationale was even 2 to 3 weeks ago," said Beutel.

Federal Reserve: The Federal Reserve, which has the power to quell runaway inflation by raising a key interbank lending rate, has been rendered inert, since the banks and other institutions that prop up the U.S. economy need the liquidity, according to Tom Orr, head of research for Weeden & Co.

In recent days, the government has issued a plan aimed at bolstering mortgage financing companies Fannie Mae (FNM, Fortune 500) and Freddie Mac (FRE, Fortune 500), and has taken control of mortgage lender IndyMac Bank (IMB).

"They've got to keep rates as low as they can, though they really should be tightening... They know they need to tighten, but they just can't," said Orr.

"This is starting to feel like Jimmy Carter and the 1970s all over again," he added, describing a time when inflation was high due in large part to soaring energy prices.

OPEC demand: The Organization of Petroleum Exporting Countries lowered its demand forecast for 2008 to an increase of 1.2% from 1.28%, blaming economic strife and high fuel prices.

Gasoline prices in the U.S. maintained their record highs at $4.109 a gallon, according to a daily survey from motorist group AAA.

Concerns about lower demand even overshadowed the tight supply picture, which has been at the forefront of oil's price surge.

Brazil: The five-day strike by Brazilian oil workers in the Campos basin at 33 offshore rigs operated by state-run oil company Petrobras entered its second day, cutting into supply.

Petrobras stated that only two rigs had been totally shut down, but that production had been reduced by 4%, according to the Associated Press.

Iran: Investors also remained concerned about tensions between Iran, the second-largest exporter in OPEC, and the United States and Israel over its nuclear program.

Iranian president Mahmoud Ahmadinejad blamed high oil prices on threats from the West in an interview with state television, according to reports. However, he said that talks with the United States were possible. To top of page