Oil Gains for First Day in Five After U.S. Stocks Pare Losses

By Margot Habiby and Samantha Zee

Oct. 7 (Bloomberg) -- Crude oil rose for the first time in five days after U.S. stocks recovered from their worst levels yesterday as some investors became optimistic government steps will succeed in easing the global credit crisis.

Oil climbed from its weakest level since February after the Dow Jones Industrial Average rose 430 points from the intraday low on speculation the Federal Reserve will cut interest rates to unfreeze credit markets. The U.S. benchmark still closed below 10,000 points for the first time in four years.

``The gain in crude came because the stock market began to recover from the large drop earlier; the market movements are so connected at the moment,'' said Tim Evans, an energy analyst with Citi Futures Perspective in New York. ``Keep your seatbelts fastened. This ride isn't over yet.''

Crude oil for November delivery rose 91 cents, or 1 percent, to $88.72 a barrel at 9:36 a.m. Sydney time on the New York Mercantile Exchange. Futures have fallen 40 percent from the record $147.27 reached July 11.

Yesterday, crude futures fell $6.07 to settle at $87.81 a barrel in New York. The contract touched $87.56, the lowest since Feb. 7. Oil dropped as European leaders pledged to bail out troubled banks and protect depositors and the dollar rose against the euro. OPEC President Chakib Khelil said yesterday the price slide will continue next year.

`Distress Signals'

New York oil prices declined 12 percent last week as reports showed U.S. fuel demand the previous four weeks was the lowest in almost seven years and manufacturing shrank in September at the fastest pace since the last recession in 2001. The Labor Department reported a bigger-than-expected 159,000 drop in payrolls in September last week.

``With the stream of economic distress signals continuing unabated, the oil market is betting that demand will really suffer,'' said Christopher Bellew, a senior broker at Bache Commodities Ltd. in London. ``A further push towards $85 is looking highly likely in these feverish conditions.''

The Standard & Poor's 500 Index retreated 3.9 percent, extending the worst weekly slump since 2001. The Dow lost 370 points, led by plunges in Alcoa Inc., Boeing Co. and Walt Disney Co. Both gauges pared declines of more than 7.7 percent in the final hour as traders increased bets on a Fed interest rate cut. The MSCI Emerging Markets Index headed for the biggest loss in its 21-year history and exchanges in Russia and Brazil halted trading. Europe's Dow Jones Stoxx 600 Index had its steepest decline since 1987.

Guaranteed Deposits

The dollar rose to the highest since August 2007 against a basket of currencies, reducing the investment appeal of dollar- denominated commodities. The euro fell as low as $1.3444, from $1.3772 Oct. 3, after Germany said it will guarantee personal bank deposits, in a bid to stabilize the nation's banking system.

The U.S. may enter a recession, the International Monetary Fund said on Oct. 2 in its most pessimistic outlook for the world's largest economy since the credit crisis began last year.

The credit crisis will deepen a U.S. recession and extend it into next year, according to a survey by the National Association for Business Economics. The economy will stall in the fourth quarter, followed by 1.3 percent annualized growth in the first three months of 2009, according to the poll of 48 professional forecasters taken Sept. 8 to Sept. 18.

``It is doubtful that the vicious downward decline we are seeing in most markets will end anytime soon, even if credit markets start to thaw out,'' said Edward Meir, an analyst at MF Global Ltd. in Darien, Connecticut.

Saudi Aramco, the world's largest state oil company, cut its prices to Asia and the U.S. The company trimmed the price of its Arab Extra Light crude by 30 cents to a discount of $3.40 a barrel below the West Texas Intermediate benchmark, the Dhahran, Saudi Arabia-based producer said earlier this week in a faxed statement. The company also cut the price of its Arab Light grade.

Brent crude oil for November settlement fell $6.57, or 7.3 percent, to $83.68 a barrel on London's ICE Futures Europe exchange yesterday, the lowest closing price since Oct. 23, 2007.

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