Hopes of Rescue Plan raise Oil to $102

Oil rose over $1 on Wednesday lingering around $102 a barrel, buoyed by hopes that Washington would find a way to pass a rescue plan to head off a deep recession in the United States and abroad.

A vote on the bailout package which will include an increase in the amount of bank deposits insured has been agreed by the Senate to happen on Wednesday night.

“The market is being totally driven by what is happening in Washington,'' said Nauman Barakat, senior vice president of global energy futures at Macquarie Futures USA Inc. in New York. “What happens to oil prices depends completely on whether the rescue package is approved or not.''

U.S. light crude for November delivery rose 81 cents to $101.45 a barrel by 0118 GMT, after rising as much as $1.60 at the start of electronic trading. The contract settled $4.27 higher at $100.64 on Tuesday in a relief rally.

London Brent crude rose 84 cents to $99.01.

"There is a strong belief that the U.S. Congress will pass the rescue plan in a few days, so that's supporting prices," said Ryuichi Sato, an analyst at Mizuho Corporate Bank in Tokyo.

"But the fundamentals for the U.S. financial markets haven't changed so there is still a lot of downside risk in that regard."

Oil's rebound comes after its steep tumble on Monday, when it dropped $10.52 in the second-biggest fall since April 23, 2003, as fear gripped financial markets after U.S. lawmakers rejected the $700 billion bailout plan.

But U.S. stocks, the dollar and oil prices have since strengthened on renewed optimism that U.S. lawmakers would soon reach a deal on a financial rescue plan.

U.S. securities regulators gave the financial industry a reprieve on Tuesday from marking hard-to-value assets down to fire sale prices, a move which threw a lifeline to an industry beset by strained credit markets and a series of bank failures.

Still, analysts said that expectations of a rise in U.S. crude inventories, along with signs that the financial crisis has spread to Europe and erode energy demand further, would keep a check on prices.

"Prices over the coming months look vulnerable to a further weakness, as sentiment continues to plummet on a weakening demand backdrop," said Mark Pervan, a resource analyst at Australia & New Zealand (ANZ) bank based in Melbourne.

“We won't be seeing oil near $150 anytime soon,'' said Sarah Emerson, managing director of Energy Security Analysis Inc., a consulting firm in Wakefield, Massachusetts. “Even if we get the bailout, there's no guarantee that it will work.''

Oil has dropped from a record high $147.27 reached in July on signs that high energy prices and the financial crisis have cut into crude demand in top energy consumer the United States and as investors -- who had rushed into commodities earlier this year as a hedge against inflation and the weak dollar - sold crude for safer havens.

President George W. Bush said the defeat of his plan to revive credit markets “is not the end of the legislative process,'' and warned lawmakers that they must act or the result will be “painful and lasting'' economic damage to the country.

“If the legislation is passed, we may avoid another bloodbath in the market,'' Barakat said. “If it's not passed, prices will easily go below the $90 of a couple of weeks ago.''

Traders are betting the Federal Reserve will cut interest rates next month, potentially shoring up fuel demand. Futures on the Chicago Board of Trade show a 28 percent chance the Fed will trim its 2 percent target rate for overnight lending between banks by 50 basis points on Oct. 29, versus little changed last week. The odds on a quarter-point cut are 72 percent.

A weaker economic growth outlook in Asia, where China's voracious energy demand has helped underpinned oil's gains in recent years, would also cast a pall over medium-term crude demand.

The fallout from the global financial crisis is seen to drag China's economic growth down to 9.9 percent this year, market the first time since 2002 that the world's fastest-growing major economy has seen growth slip to single digits.




Author: Jo Amey