OIL prices tumbled more than US$10 a barrel yesterday, dropping back below US$100 as a US financial bailout failed to win legislative approval, raising fears of a prolonged economic downturn that could drastically erode global energy demand.
Light, sweet crude for November delivery sank US$10.52, or 9.8 percent, to settle at US$96.36 on the New York Mercantile Exchange, after earlier dropping as low as US$95.04. In London, November Brent crude fell US$9.56 to settle at US$93.98 a barrel on the ICE Futures exchange.
The dramatic sell-off capped a week of frenzied volatility in oil markets.
A week earlier, prices shot up over US$16 to US$120.92 a barrel in the biggest one-day dollar gain ever. But as disagreements over the US government's US$700 billion bailout plan intensified over the last several days, oil market traders began moving out of their positions at a rapid clip yesterday's decline was the second largest ever in dollar terms and the biggest percentage-wise since 2001. Crude has now fallen almost US$25, or 20 percent, in the last seven days.
yesterday's nosedive came as House of Representatives lawmakers defeated the emergency measure, which would have absorbed billions of dollars in banks' bad mortgage-related debt and other risky assets in a bid to steady the teetering economy. Democratic and Republican lawmakers pledged to try and work out another deal, but oil markets traders viewed the defeat as another bearish weight on oil.
"This is an acknowledgment that the global slowdown is here and energy demand is not going to be what it was," said Phil Flynn, energy analyst at Alaron Trading Corp. in Chicago.
Oil market traders were skeptical before the plan was voted down. Many doubted it would go far enough to unfreeze credit markets and restore calm to the financial system. If the economy worsens, analysts say businesses could be forced to lay off workers, leading Americans to cut back on driving and other energy use in the world's largest consumer.
Energy consumption overseas is also expected to drop, even in fast-growing developing countries such as India and China, where booming demand for cars and other goods helped drive the oil bubble earlier this year.
"With demand falling at the pace it is, nothing can support crude at levels above US$100," said James Cordier, president of Tampa, Florida-based trading firms Liberty Trading Group and OptionSellers.com. "There's no underlying demand from any pocket."
Other commodities also traded sharply lower yesterday as investors bet that a widening economic malaise will swallow demand for building materials, grains and other goods.
The rescue plan would have given the administration broad power to use hundreds of billions of taxpayer dollars to purchase devalued mortgage-related assets held by cash-starved financial firms.
Congress insisted on a stronger hand in controlling the money than the White House had wanted. The government would have taken over huge amounts of devalued assets from beleaguered financial companies in hopes of unlocking frozen credit.
House lawmakers planned to reconvene on Thursday instead of adjourning for the year as planned, but it was unclear if they would hold another vote on the bailout.
Oil prices were also pushed down by a stronger dollar. Investors often buy crude futures as a hedge against a weakening dollar and inflation, and sell when the dollar strengthens.
The 15-nation euro fell yesterday to US$1.4414 from US$1.4614 on Friday.
In other Nymex trading, heating oil futures fell 22.89 cents to settle at US$2.7885 a gallon, while gasoline futures dropped 26.81 to settle at US$2.397 a gallon. Natural gas futures lost 40.7 cents to settle at US$7.221 per 1,000 cubic feet.