Oil prices bounce higher after government bails out AIG, dollar gains vs euro
NEW YORK (AP) -- Oil prices rebounded Wednesday as a government rescue of American International Group Inc. soothed skittish investors who feared the insurer's collapse could have triggered a wholesale exodus from commodities.
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Light, sweet crude for October delivery rose $1.45 to $92.60 a barrel in early trading on the New York Mercantile Exchange.
Meanwhile at the pump, retail gas prices were virtually flat compared with the previous session as more Gulf Coast refineries began ramping up operations after the passage of Hurricane Ike. A gallon of regular inched up one-tenth of a penny to a new national average of $3.855, according to auto club AAA, the Oil Price Information Service and Wright Express.
Some recovery in crude was expected after the contract dropped $10 in the previous two sessions, bringing prices to their lowest level in seven months and down 8 percent for the year. At one point Tuesday, oil touched $90.51 a barrel, its lowest since Feb. 8, and down 39 percent from a record $147.27 on July 11.
Still, recent rallies often have been followed by sharp selloffs as oil market traders try to wring whatever money they can out of the quickly deflating oil bubble.
Wednesday's oil gain was energized by the bailout of AIG. The Federal Reserve on Tuesday agreed to pump $85 million in taxpayer money into the insurance giant in return for a 79.9 percent ownership stake. The lifeline was aimed at avoiding an AIG collapse due to massive losses tied to the subprime mortgage crisis and the credit crunch.
If AIG had been allowed to fail, investors feared the company would move to unwind positions in energy and other commodities to raise cash, setting in motion another big commodities liquidation. Oil's big two-day price drop this week was due in part to similar concerns that surfaced after Lehman Brothers Holdings Inc. filed for bankruptcy Monday.
"The fear was that if AIG was allowed to go down, we could be looking at a huge exit from financial instruments across the spectrum: equities, oil futures, everything," said Jim Ritterbusch, president of energy consultancy Ritterbusch and Associates in Galena, Ill.
A slightly weaker dollar also gave oil prices a boost. A falling greenback encourages investors to shift funds into commodities, which are often bought as safe-haven assets used to hedge against inflation or weakness in the U.S. currency.
With so much uncertainty surrounding the U.S. financial system and fears that slowing economic growth will undermine crude demand, Wednesday's jump in oil prices probably has not broken the recent downward trend.
Events that would usually boost prices -- such as OPEC cutting output by 520,000 barrels a day last week, or damage to oil installations on the Texas coast by Ike last weekend -- haven't done so.
"The OPEC cut didn't have any impact," said Peter McGuire, managing director at investment firm Commodity Warrants Australia in Sydney. "Then Ike didn't slow the market either."
Also Wednesday, the U.S. government reported a bigger-than-expected drop in crude supplies, reflecting the shutdown of virtually all Gulf Coast oil production because of Ike and Hurricane Gustav.
The Energy Information Administration said U.S. crude stocks fell by 6.3 million barrels for the week ending Sept. 12, much bigger than the 3.7 million barrel drop expected by analysts surveyed by energy research firm Platts expected.
Gasoline inventories fell by 3.3 million barrels to 184.6 million barrels. Analysts expected stockpiles of the motor fuel to fall by 3.6 million barrels.
Meanwhile, inventories of distillate fuel, which include diesel and heating oil, fell by 900,000 barrels to 129.6 million barrels for the week ended Sept. 12. Analysts expected distillate stocks to slip by 1.7 million barrels.
Violence continued Wednesday across Nigeria's restive Niger Delta oil region. Nigeria's main militant group said it destroyed an oil-pumping station and a pipeline that crosses southern Nigeria, extending a spate of violence into a fifth day. The Movement for the Emancipation of the Niger Delta also said it attacked an oil pumping station overnight, destroying the flow station run by the local unit of Royal Dutch Shell PLC after battling security forces protecting the site.
In other Nymex trading, heating oil futures fell about half a penny to $2.716 a gallon, while gasoline prices lost 2.3 cents to $2.3775 a gallon. Natural gas for October delivery added 38 cents to $7.939 per 1,000 cubic feet.
In London, November Brent crude rose $1.72 to $90.94 a barrel on the ICE Futures exchange.
Associated Press writers Louise Watt in London and Alex Kennedy contributed to this report from Singapore.
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