Oil prices down on Bear Stearns concerns

Oil prices have plunged Monday at least temporarily retreat to record levels, investors were concerned that the financial crisis that forced the sale of Bear Stearns is a sign of deep economic difficulties.

Oil slump – falling $ US4.53 to settle at $ US105.68 barrel on the New York Mercantile Exchange – came hours after futures reached a new peak of $ US111.80 trading on the Federal Reserve to move Sunday least one key interest rate a quarter point.

Gross plunge came at a time when the price of diesel rose to a new high above $ US4 one gallons (3.8 liters), and gas prices have remained high. Diesel, used for transporting the vast majority America’s goods rose by 1.3 cents to a national average of $ US4.002 one gallons Monday, according to AAA and Oil Price Information Service. The United States average price for a gallon of gas, meanwhile, declined slightly to $ US3.283 gallon, but it remains 73 cents higher than a year ago.

Over the past few months, Fed rate cuts have fueled rallies in oil prices. Gross ultimately provide a hedge against a fall in the dollar, and oil futures are bought and sold in dollars more attractive for foreign investors when the dollar is falling. Declines in interest rates, and even the prospect of future cuts, tend to weaken the dollar further.

But the massive sale Monday – despite the Fed rate cut on Sunday, the prospect of another Fed cut at Tuesday’s regular meeting and the fact that the dollar has fallen to new low against the euro on Monday – could be a sign that the oil market is the momentum turned negative, analysts say.

“People have to say, well, things are much more serious than we thought,” said Phil Flynn, analyst at Alaron Trading Corp. in Chicago.

The Bear Stearns sale contributed to this fear. JPMorgan on Sunday agreed to leave Bear Stearns by buying the investment bank in a Fed-backed deal worth $ US236.2 million. While Bear Stearns share closed at $ US30 a share, on Friday, JP Morgan will pay only $ US2 per share. The operation, while avoiding a bankruptcy filing by Bear Stearns, have demonstrated the seriousness of the impact of credit in the country.

For much of the recent oil rally, the market shrugged off signs of economic weakness, investors bet that the Fed rate cuts would continue, a further weakening of the dollar and drawing fresh investments in futures oil. On Monday, that changed.

“Apparently, the fears of recession outweighed the effect of the sharp fall in the dollar,” said Eric Wittenauer, an analyst with AG Edwards & Sons Inc., in a research note.

Investors received more bad economic news when the Fed released data revealed Monday that the nation, industrial production fell by 0.5 per cent in February. Analysts had expected an increase of 0.1 percent.

Since oil moved above $ US100 a barrel last month, a growing number of analysts have pointed out that oil prices are in a bubble. Several forecasters have lowered forecasts for growth in demand this year, while deliveries have increased.

“The oil market fundamentals did not support the prices we had originally,” said Addison Armstrong, director of exchange traded markets at TFS Energy Futures LLC in Stamford, Connecticut.

A retreat in the oil market could spell relief for consumers. Energy prices have forced themselves by consumers to cut discretionary spending, a trend that has hurt retail sales. Higher costs for fuel have also been the cause of the high price of everything else, too.

Still, gasoline prices are expected to rise as demand resumed in the spring and summer. In its latest forecast, the Department of Energy said it expects gas prices expected to rise to about $ US3.50 a gallon, while many analysts say prices could peak between $ US3. 75 and $ US4. These estimates could drop if oil remains at retirement.

Diesel is the sharp rise of the nation strikes particularly hard truckers, said Bill Graves, executive director of the American Trucking Association.

“There is little to suggest that fuel prices will decline anytime soon,” Graves said in a statement. “Escalating fuel prices are hurting (truckers) that affect companies and their livelihoods.”

Other energy futures also fell sharply Monday. April futures heating oil 7.81 cents to settle fell to $ US3.0684 April gallon while gasoline futures plunged 18.52 cents to settle at US $ US2.5042 gallon.

April natural gas futures fell 76.8 cents to settle $ US9.10 for 1,000 cubic feet.

In London, May Brent $ US4.45 futures fell to reach US101.75 dollars a barrel on the ICE Futures exchange.