September 18, 2008


Oil prices rebounded yesterday, retracing part of a two-day $10 a barrel drop. Analysts said the decline may have been overdone. Prices also got a boost on news of the U.S. Federal Reserve's $85 billion emergency loan to rescue insurance giant American International Group, which helped stabilise global markets rattled by the recent failure of U.S. investment bank Lehman Brothers. "Prices had really fallen off a cliff," said Peter McGuire, managing director at investment firm Commodity Warrants Australia in Sydney. "When a market falls 25 per cent in three weeks and 40 per cent in two months, it tends to find some support for a bounce back." Light, sweet crude for October delivery on the New York Mercantile Exchange rose $2.34 to $93.49 a barrel in electronic trading by mid afternoon in Europe. The contract fell $4.56 to settle at $91.15 on Tuesday, after dropping $5.47 on Monday. At one point Tuesday, oil touched $90.51 a barrel, its lowest since Feb. 8, and down 39 per cent from a record $147.27 on July 11. "Worries about the U.S. financial system, a lack of liquidity and fears for world oil demand all pressured the market," wrote analysts at JBC Energy in Vienna, Austria. But they added that a rebound in early trading yesterday could be attributed to the Federal Reserve's decision to bail out AIG. The Federal Reserve said in a statement Tuesday that a disorderly failure of AIG could hurt financial markets already reeling from a yearlong credit crisis that led to the bankruptcy of Lehman Brothers earlier this week. It also could have led "to substantially higher borrowing costs, reduced household wealth and materially weaker economic performance," the Fed said. It said in return for the loan, the U.S. government would receive a 79.9 per cent equity stake in AIG. With so much uncertainty surrounding the U.S. financial system and fears that slowing economic growth will undermine crude demand, Wednesday's jump in oil prices probably has not broken the recent downward trend, McGuire said. Events that would usually boost prices - such as Organisation of Petroleum Exporting Countries (OPEC) cutting output by 520,000 barrels a day last week, or damage to oil installations on the Texas coast by Hurricane Ike last weekend - haven't done so. "The OPEC cut didn't have any impact," McGuire said. "Then Ike didn't slow the market either." Guardian

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