OIL prices swung higher in erratic trading yesterday as a US financial rescue plan won preliminary approval from lawmakers, raising expectations of a resurgance in domestic energy demand.
Light, sweet crude for November delivery rose US$2.29 to settle at US$108.02 a barrel on the New York Mercantile Exchange after edging slightly lower for much of the day. Oil shed 88 cents to settle at US$105.73 on Wednesday.
Investors were hopeful as congressional leaders from both parties said they have agreed in principle to a US$700 billion plan aimed at saving the US financial system, apparently answering a plea by President George W. Bush to quickly approve the sweeping package. The lawmakers said they would present it to the White House in hopes of a vote within days.
Oil traders say the plan could revive a sputtering economy and reverse steadily dwindling fuel consumption by American consumers and businesses. But others say the huge outlay of taxpayer money will also weigh on the dollar since the government would have to essentially print money to pay for the package, an inflationary move likely to enhance the appeal of commodities like oil. Investor often buy commodities, which are known for holding their value, to hedge against a weak dollar.
"I think we're seeing some buying on expectations that the bailout will succeed," said Peter Beutel at Cameron Hanover, New Canaan, Connecticut. "They're buying for both reasons, that it could increase demand for crude and also that it's very inflationary, and the money has got to come from somewhere."
The credit crisis has prompted American consumers and business to cut back on energy consumption, sending demand for gasoline to levels sharply lower than a year ago. Still, some analysts have questioned whether the plan will be enough to energy demand to bounce back and say oil prices could be headed lower in the near-term.
"It's very difficult to justify US$100 oil with the lack of demand in this economy," said Stephen Schork, an analyst and oil market trader in Villanova, Pennsylvania.
Oil companies are restaffing Gulf platforms and rigs after the storms plowed through the region, but most production remains offline. Nearly 63 percent of crude output and 57 percent of natural gas production was still shut-in as of Wednesday, the US Minerals Management Service said.
Damage to U.S. Gulf Coast refineries prompted Mexican state oil company Pemex to reduce its daily output by 250,000 barrels a day. The company said it expects production to be back to normal by the end of the week.
OPEC's decision earlier this month to cut production by 520,000 barrels a day and militant threats to Nigerian oil operations have added to the supply shortage and have kept crude prices in check, analysts said.
Crude's recovery came despite a slightly stronger dollar, which inched higher against the 15-nation euro on Thursday. The euro bought US$1.4595, down slightly from US$1.4658 late Wednesday in New York.
In other Nymex trading, gasoline futures rose 10.26 cents to settle at US$2.6973 a gallon, while heating oil futures rose 2.13 cents to settle at US$3.0483 a gallon. Natural gas futures rose 2.3 cents to settle at US$7.931 per 1,000 cubic feet.
In London, November Brent crude rose US$2.15 to settle at US$104.60 a barrel on the ICE Futures exchange.