Oil Falls in New York Before Vote on U.S. Financial Rescue Plan

By Angela Macdonald-Smith and Christian Schmollinger

Sept. 29 (Bloomberg) -- Crude oil fell in New York before a vote on a $700 billion U.S. bank-rescue plan amid concern the measures won't prevent an economic slowdown that would cut demand in the world's biggest energy-consuming nation.

U.S. lawmakers are reviewing a tentative agreement to revive credit markets through the bailout package, which may be voted on by the House tomorrow, House Speaker Nancy Pelosi said. Oil prices dropped as much as 3.5 percent on Sept. 26 after House Republicans rejected the proposed rescue.

``Even if the Troubled Asset Rescue Plan is passed, that doesn't necessarily mean there aren't any obstacles on the road to economic recovery,'' said David Moore, a commodity strategist at Commonwealth Bank of Australia in Sydney. ``There are worries about the outlook for the international economy.''

Crude oil for November delivery declined as much as $1.82, or 1.7 percent, to $105.07 a barrel in after-hours electronic trading on the New York Mercantile Exchange. The contract was at $105.21 a barrel at 2:33 p.m. in Singapore.

Prices have fallen 28 percent from a record $147.27 a barrel on July 11. Oil has dropped 25 percent during the third quarter, which ends tomorrow. Crude has averaged $118.64 a barrel during the period.

President George W. Bush said in a speech Sept. 27 that the package was needed to prevent a ``deep and painful recession.'' Talks continued through the weekend aimed at reaching agreement before global financial markets reopened this week. The plan would give Treasury Secretary Henry Paulson an immediate $250 billion to buy bad loans from financial companies, with the rest to be doled out in stages.

``In the past you would have seen more faith in U.S. markets equaling more demand and you would have seen crude go higher, but now we seem to have a long way to go,'' said Jonathan Kornafel, a director for Asia at Hudson Capital Energy in Singapore. ``We're seeing a restoration of hope for the U.S. market but that doesn't equate to a return of crude demand.''

`Fallen Markedly'

U.S. fuel demand averaged 19.5 million barrels a day during the past four weeks, the lowest since October 2003, the Energy Department said in a Sept. 24 report. New home sales in the U.S. fell in August to a 17-year low and orders for durable goods dropped more than forecast, government reports showed Sept. 25.

``We have a situation where the evidence to date is that in recent months U.S. oil consumption has fallen quite markedly,'' Commonwealth Bank's Moore said.

Oil also fell as companies continued restarting petroleum production plants, refineries and pipelines after hurricanes Gustav and Ike. Royal Dutch Shell Plc, the largest oil producer in the Gulf of Mexico, said Sept. 26 it will have the majority of its offshore output back in one to two weeks.

The return of the refineries may not translate into increased oil demand for processing into gasoline, said Hudson Capital's Kornafel, pointing to the low price difference, or crack margin, between motor fuel futures and crude.

`Weak Margin'

That difference is at $2.85 a barrel, 4.7 percent less than last year. The spread fell to a low of minus $7.36 a barrel on Sept. 22.

``The refining margin is so weak and demand is so low that even with the refineries out you haven't seen the margin return,'' said Kornafel. ``There is just no rush it seems to make more gasoline at the moment.''

Crude-oil prices may fall this week on the concern U.S. fuel consumption will weaken because of lower economic growth, a Bloomberg News survey found. Fourteen of 29 analysts surveyed, or 48 percent, said prices will decline through Oct. 3.

In contrast, hedge-fund managers and other large speculators increased their net-long positions in New York crude futures in the week ended Sept. 23, according to U.S. Commodity Futures Trading Commission data. Speculative long positions, or bets prices will rise, outnumber short positions by 41,728 contracts on the New York Mercantile Exchange, the Washington-based commission said in a report Sept. 26.

``The overall opinion is that the market in the long-term is going to bounce back up, it's just a question of when,'' said Hudson Capital's Kornafel. ``We're certainly near a bottom, whether its $85, $90, or $100, so it's a question of people getting back into the market.''

Brent crude oil for November settlement fell as much as $1.61, or 1.6 percent, to $101.92 a barrel on London's ICE Futures Europe exchange. It was at $102.06 a barrel at 2:35 p.m. Singapore time.

To contact the reporters on this story: Angela Macdonald-Smith in Sydney at amacdonaldsm@bloomberg.net; Christian Schmollinger in Singapore at christian.s@bloomberg.net.