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A crude blow for oil bulls

The commodity finishes $6.44 lower, its largest one-day slide since 1991.

July 16, 2008|Elizabeth Douglass | Times Staff Writer

The darkening gloom that hangs over the U.S. economy spread to the oil markets Tuesday, sending the cost of crude tumbling $6.44 a barrel in the largest one-day plunge since 1991.

In a wild day of trading, the cost of light, sweet crude oil for August delivery closed at $138.74 a barrel on the New York Mercantile Exchange.

But before that moment of relative calm, prices seesawed crazily during electronic and New York pit trading. At one point, the difference between the day's highest and lowest oil trade exceeded $10. Tuesday's decline represented the biggest dollar drop since January 1991, the beginning of Operation Desert Storm in Iraq.

Even at its most expensive Tuesday, crude fell short of the record high of $147.27 set Friday. The essential commodity has seen large price swings -- both up and down -- in recent weeks.

Despite oil's decline, stocks headed mostly lower with the Dow Jones industrials falling 92.65 points, or 0.8%, to 10,962.54 -- the first close below the 11,000 mark since July 2006.

Some energy analysts said the catalyst Tuesday was testimony from Federal Reserve Chairman Ben S. Bernanke, who said the Fed must remain "particularly alert" to any sign that inflation is getting out of control.

Bernanke's remarks suggested that at the Federal Reserve "inflation is still Job One," said Phil Flynn, a vice president with Chicago's Alaron Trading Corp. "The oil traders are fearful that the Fed will raise interest rates, and if they do, that means the price of oil will come down. . . . So that was the signal to get out of their trades."

Disruptions in output from oil-producing countries and other worries remain a factor in the crude market, he said, "but they really took a back seat today to the Federal Reserve."

With the stock market swooning, banking and real estate holdings in free fall and the dollar's value sinking against the euro, a wave of buyers latched onto oil in recent months as a more solid investment, Flynn said. A year ago, crude was selling in the neighborhood of $74 a barrel.

But increasing evidence of a slowdown in the U.S. economy has been interpreted by traders as a sign that oil demand would continue to weaken in the world's largest oil-consuming nation, he added.

U.S. oil consumption has slumped amid soaring oil prices and gas prices that zoomed past $4 a gallon. The nationwide average cost of self-serve regular was $4.109 a gallon Tuesday, while California's statewide average was $4.51 a gallon, according to AAA.

The Organization of the Petroleum Exporting Countries said Tuesday that a sluggish global economy would reduce demand for the cartel's crude next year to an average of 31.2 million barrels a day, down 710,000 barrels a day from this year's forecast.

Market researcher Stephen Schork, however, rejected the notion that the souring economy triggered Tuesday's oil sell-off. "We had lousy economic news, and you had Bernanke raising inflation worries . . . but all we saw today was noise," said Schork, who writes a daily report about energy prices from Villanova, Pa.

"This market fell in a virtual vacuum," he said, with no major supply or demand news to justify the steep drop. He and others added that oil prices had taken frequent U-turns this year and could easily head higher again.

"You can't be too excited about this," Schork said. "This is just a Las Vegas casino on steroids right now."




Earnings: High crude prices hurt profit at firms' refining units. Page C4

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