Oil Is Steady After Dropping as Financial Rescue Plan Defeated

By Mark Shenk

Sept. 30 (Bloomberg) -- Crude oil was little changed after dropping the most in almost seven years yesterday as the U.S. House of Representatives rejected a $700 billion financial- rescue plan and stocks plummeted.

Oil slumped more than $10, helping send the Reuters/Jefferies CRB Index of 19 commodities to the biggest drop since at least 1956, after the House voted 228 to 205 against the measure. Commodities also dropped as the pound and the euro weakened against the dollar after European banks were bailed out.

``At this point, economic prospects can only be characterized as dim,'' said John Kilduff, senior vice president of risk management at MF Global Inc. in New York. ``With the financial crisis engulfing Europe, one has to wonder whether Asian demand can be maintained, which was the last hope for energy bulls.''

Crude oil for November delivery fell 22 cents, or 0.2 percent, to $96.15 a barrel at 8:37 a.m. Sydney time on the New York Mercantile Exchange. Prices are down 35 percent from the record $147.27 a barrel reached on July 11 and are heading for the first quarterly drop since the end of 2006.

Yesterday, oil fell $10.52, or 9.8 percent, to $96.37 a barrel, the biggest drop in percentage terms since Nov. 15, 2001, and the largest dollar decline since Jan. 17, 1991, when U.S.- led forces expelled Iraq from Kuwait.

Stocks Plunge

U.S. stocks plunged and the Standard & Poor's 500 Index tumbled the most since the 1987 crash after House rejected the bailout package. The Dow Jones Industrial Average slid 778 points for its biggest point drop ever as $1.2 trillion in market value was erased from U.S. equities.

``Liquidity is also being reduced, and commodities, as an investment, are clearly a casualty,'' Kilduff said. ``I don't see triple-digit crude oil being maintained in the aftermath of the financial crisis.''

Gasoline for October delivery declined 26.81 cents, or 10 percent, to settle at $2.397 a gallon in New York, the biggest drop since the ethanol-based contract began trading in October 2005. Heating oil dropped 23.45 cents, or 7.8 percent, to $2.7604 a gallon.

U.S. fuel demand averaged 19.5 million barrels a day in the four weeks ended Sept. 19, the lowest since October 2003, according to Energy Department data.

Fortis Lifeline

A 12 percent drop shown for the crude oil contract closest to delivery on Sept. 23 reflected the price change between the October futures contract, which expired Sept. 22, and November futures, which became the front-month contract on Sept. 23. The November contract fell 2.5 percent on Sept. 23.

The euro and pound dropped against the dollar after Belgium, the Netherlands and Luxembourg extended an 11.2 billion-euro ($16.3 billion) lifeline to Fortis, the largest Belgian financial-services firm, and the U.K. Treasury seized Bradford & Bingley Plc, the nation's biggest lender to landlords.

The dollar strengthened 1 percent to $1.4469 per euro at 3:47 p.m. New York time, and the pound lost 1.8 percent to $1.8115.

A stronger dollar makes commodities more expensive for buyers outside the U.S., potentially weakening demand.

``The spread of credit problems to Europe is raising concerns that demand will begin to drop off as it already has in the U.S.,'' said Addison Armstrong, director of market research at TFS Energy LLC in Stamford, Connecticut. ``The dollar is on a tear against the euro and pound because of the rescue of a number of European banks over the weekend.''

Forecast Slashed

Deutsche Bank AG slashed its 2009 New York oil price forecast by 23 percent to $92.50 a barrel on concern the financial crisis may curb global economic growth, weakening fuel demand. ``Commodities will be unable to escape the contagion,'' Deutsche analysts Adam Sieminski in Washington and Michael Lewis in London said in a report yesterday.

The CRB Index tumbled 21.35 to 343.22, the biggest drop in data going back to 1956. The index has slumped 28 percent from a record on July 3.

``Six months ago people thought the downturn would be contained within the U.S.,'' said Michael Lynch, president of Strategic Energy & Economic Research in Winchester, Massachusetts. ``Increasingly it looks like this is spreading to both Europe and Asia.''

Brent crude oil for November settlement declined $9.56, or 9.2 percent, to settle at $93.98 a barrel on London's ICE Futures Europe exchange.

To contact the reporter on this story: Mark Shenk in New York at mshenk1@bloomberg.net.