Crude Oil Falls as Worsening Credit Crisis May Curb Fuel Demand

By Margot Habiby and Samantha Zee

Oct. 8 (Bloomberg) -- Crude oil fell after U.S. equities slumped on speculation banks and real-estate companies are running short of money because of a worsening credit crisis that may curb economic growth and energy demand.

Oil retreated after rising 2.6 percent yesterday, its first rally in a week. The Standard & Poor's 500 Index fell below 1,000 for the first time since 2003. U.S. Federal Reserve Chairman Ben S. Bernanke signaled policymakers are ready to lower interest rates as the credit freeze deepens.

``It really looks like a global financial situation of run to cover, run to cash,'' said Kyle Cooper, an analyst at IAF Advisors in Houston. ``That seems to be the driver. Any type of financial asset is being liquidated to some extent.''

Crude oil for November delivery fell 82 cents, or 0.9 percent, to $89.24 a barrel in electronic trading on the New York Mercantile Exchange at 10:29 a.m. Sydney time.

Futures have declined 39 percent from the record $147.27 reached July 11. Yesterday, crude oil rose $2.25 to $90.06 a barrel in New York.

The stock market malaise has spurred concern that growth will slow and crimp demand for fuels. The S&P 500 slid 60.66 points, or 5.7 percent yesterday, to 996.23, extending its 2008 tumble to 32 percent in the market's worst yearly slump since 1937. The Dow Jones Industrial Average dropped 508.39, or 5.1 percent, to 9,447.11, giving it a 29 percent retreat in 2008 that would also be the worst in 71 years.

OPEC Production

Yesterday, members of OPEC acted to stall the slide in oil prices. Libya's top oil official called for a production cut, and Qatar's oil minister said the country is reducing output in line with quotas. Organization of Petroleum Exporting Countries President Chakib Khelil said earlier this week that the group will take ``appropriate measures'' to stabilize markets.

``It reassures the market that OPEC is paying attention, and they're ready to take action at such a point where they deem it necessary,'' said Michael Lynch, president of Strategic Energy & Economic Research in Winchester, Massachusetts. ``It looks like somewhere around $80, they'll take action.''

Arjun Murti, the Goldman Sachs Group Inc. analyst who predicted a crude ``super spike'' in March 2005, said there is a ``downside'' risk to his forecast that oil may rise to $120 in the fourth-quarter.

``Oil prices increasingly appear unlikely to sustain a rally until global GDP expectations bottom,'' Goldman said in a note. ``While we believe oil supply/demand fundamentals are not as bearish as is sentiment, we recognize that concern continues to mount towards global oil demand growth.''

U.S. Cuts Forecast

The U.S. government cut its forecast for crude oil, gasoline and winter heating fuel prices as global demand slows with the staggering economy.

West Texas Intermediate crude oil, the U.S. benchmark, will average $112 a barrel in 2008, the Energy Department said in its monthly Short-Term Energy Outlook. The forecast is down 3.3 percent from $115.81 a barrel estimated last month, the report from the department's Energy Information Administration showed.

Brent crude oil for November settlement rose 98 cents, or 1.2 percent, to $84.66 a barrel on London's ICE Futures Europe exchange yesterday.

U.S. fuel supplies probably rose as refineries that shut for hurricanes Gustav and Ike last month resumed output, a Bloomberg News survey of analysts showed. Refineries operated at the lowest rate in at least 19 years after the storms struck the Gulf of Mexico coast. Stockpiles of gasoline in mid-September were the lowest since 1967.

Inventories of the motor fuel probably climbed 1.5 million barrels in the week ended Oct. 3 from 179.6 million barrels the week before, according to the median of nine analyst estimates before an Energy Department report today. Seven of the analysts forecast a gain, one expected a drop and one said there was no change.

To contact the reporter on this story: Margot Habiby in Dallas at mhabiby@bloomberg.net; Samantha Zee in Los Angeles at szee@bloomberg.net.