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Oil falls to below US$78 on recession fears

world Updated: Oct 15, 2008 11:26 IST

Oil prices fell to US$ 78 a barrel on Wednesday in Asia on concern a massive bank bailout by the US and Europe won't keep the global economy from slipping into a severe slowdown that would erode crude demand.

Light, sweet crude for November delivery was down 72 cents to US$ 77.91 a barrel in electronic trading on the New York Mercantile Exchange by midday in Singapore. The contract fell overnight US$ 2.56 to settle at US$ 78.63.

"People are worried that the world economy is heading for recession," said Gerard Rigby, an energy analyst at Fuel First Consulting in Sydney. "The bailout may save the banks, but companies are still laying off workers and demand is going to suffer."

The US plans to spend as much as US$250 billion this year of a US $700 billion bailout buying stock in private banks, President George W Bush said on Tuesday. Governments across the globe have pledged more than US $3 trillion to prop up ailing banks in a bid to stabilize a credit crisis that began last year in the US sub-prime mortgage market.

Former US Federal Reserve Chairman Paul Volcker said on Tuesday the US and Europe face a "considerable recession." "The banks might be ok, but the rest of the economy needs help as well," Rigby said.

Investors are watching for signs of slowing US demand in the weekly oil inventories report to be released on Thursday from the US Energy Department's Energy Information Administration. The petroleum supply report was expected to show that oil stocks rose 3.1 million barrels last week, according to the average of analysts' estimates in a survey by energy information provider Platts. The Platts survey also showed that analysts projected gasoline inventories rose 3.1 million barrels and distillates went down 850,000 barrels last week.

Crude stocks have grown as oil installations in the Gulf of Mexico that were shut down by Hurricane Ike last month begin operations again.

"There is some demand destruction in that forecast, but there's also hang over from the hurricane as refineries come back on line," Rigby said.

In other Nymex trading, heating oil futures were steady at US $2.26 a gallon, while gasoline prices fell 1.23 cents to US$ 1.87 a gallon. Natural gas for November delivery dropped 2.7 cents to US $6.70 per 1,000 cubic feet (28 cubic meters).

In London, November Brent crude rose 78 cents to US $73.75 a barrel on the ICE Futures exchange.