Analysis: CRUDE oil futures dropped in choppy dealing yesterday, knocked lower by doubts about the US government�s $700bn plan to bail out stricken banks and mortgage companies and by investors who booked profits after an epic one-day rise in the previous session.
Crude oil futures dropped in choppy dealing yesterday, knocked lower by doubts about the US government's $700bn plan to bail out stricken banks and mortgage companies and by investors who booked profits after an epic one-day rise in the previous session.
Oil prices had surged on Monday in volatile trading as investors fled to oil as a safe haven amid unease about the mammoth bail-out plan.
The November US crude contract rose nearly $7, while the expiring October contract, which traded up to $25 higher, settled up 15.7% at $120.92 - the biggest one-day gain on record.
The US regulator of futures markets, the Commodity Futures Trading Commission, said it was reviewing the price jump to ensure that the trading was valid.
US light, sweet crude for November delivery fell $2.73 to $106.64 on the New York Mercantile Exchange. In London, November Brent crude fell $2.04 to $104 a barrel on the ICE Futures exchange.
Michael Lewis, head of commodities research at Deutsche Bank in London, said the big rise on Monday represented a combination of one-off circumstances and a re-interpretation of supply and demand issues.
"The mood changes on a daily basis from euphoria to despair and back again." Lewis said. "Some fundamentals, which were lurking behind the scene, seem to have come to the fore."
A drop in supplies in the United States - the world's biggest consumer of petroleum products - was one of the factors that pushed up the price on Monday. Supply problems in Nigeria, where rebels are fighting the government in the oil-producing part of the west African country, was another.
US crude oil and fuel inventories fell last week because production platforms, refineries and ports along the Gulf of Mexico were shut in the aftermath of Hurricanes Gustav and Ike.
Dollar weakness also weighed on Monday's crude prices. A fall in the value of the greenback can boost the appeal of commodities to investors seeking to hedge against inflation and the weak greenback.
The dollar rose yesterday against a basket of other major currencies, making oil less attractive to speculators.
Despite all the problems in the US financial sector, which might be expected to weigh on demand, "the market was tight", Lewis said.
After hitting a record high of $147.27 a barrel in July, oil dropped to around $91 a barrel last week on mounting evidence that high energy costs and slowing economic growth were having an impact on fuel demand in large consuming nations.
However, analysts at Barclays Capital predicted crude prices would remain strong for the coming months.
They said in a report that developments such as lower Saudi Arabian supplies to oil companies, the unrest in Nigeria and higher-than-expected Chinese imports would support prices.
Bank of England policymakers have expressed concern about high oil prices several times this year, warning that they exert powerful inflationary pressures on the UK economy.
Meanwhile, the low-fare airline Ryanair said it remains unhedged for its fuel needs beyond the end of this year and believes oil prices will resume their recent downward path after Monday's record one-day rise.
