Oil falls below $107 after record one-day surge

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(Agencies)
Updated: 2008-09-23 20:22

LONDON -- Oil dropped $3 a barrel on Tuesday, weighed by doubts about the US bailout plan and as investors booked profits after an historic one-day rise in the previous session.

In this Wednesday, April 23, 2008 file photo, oil pump jacks are seen at sunset in a corn field near Divernon, Ill.. Oil prices briefly spiked more than $25 a barrel Monday, Sept. 22, 2008, shattering the record for the biggest one-day gain as unease about the government's $700 billion bailout plan pummeled the dollar and spurred investors to buy safe-haven assets. An expiring crude contract added fuel to the frenzied rally. [Agencies]

Although oil surged a day earlier on hopes the plan would support the economy and fuel demand, analysts said doubts lingered over how the package would be paid for. The concern also pressured European and Asian stocks.

"It started off with a wave of optimism and now perhaps a bit of realism has kicked in," said Christopher Bellew, a broker at Bache Commodities.

"The dollar's weak, but the stock market is weak as well. The implications of that for demand are probably why we're coming back down again."

US crude for November fell $3.01 to $106.36 a barrel by 5:15 a.m. EDT. Brent crude for the same month was off $3.12 to $102.92.

The November US crude contract rose nearly $7 on Monday, while the expiring October contract, which traded up to $25 higher, settled up 15.7 percent at $120.92 -- the biggest one-day gain on record.

"I think traders are taking profits after the rally in both October and November contracts last night," said Gerard Rigby, an independent energy consultant based in Sydney.

"There are still a lot of question marks on the bailout plan and the longer it takes to be approved, the more doubts the market will have."

The $700 billion plan to shore up the battered US financial system looked set to drag into next week as Washington lawmakers haggled over how exactly they could make Wall Street pay for its rescue.

Oil's gain on Monday was helped by a drop in the dollar, which can boost the appeal of commodities to investors. The US currency was up slightly on Tuesday against a basket of other major currencies.

The US regulator of futures markets, the Commodity Futures Trading Commission, said on Monday it was reviewing the price jump to ensure that the trading was valid.

Since hitting a record high of $147.27 a barrel in July, oil has tumbled on mounting evidence that high energy costs and slowing economic growth were undercutting global fuel demand.

Oil use in the United States, the world's biggest consumer, is running about 4 percent below last year, according to the latest government data.

In a report titled "The world did not run out of crude oil on October expiry," BNP Paribas' Harry Tchilinguirian said the prices reached by the October contract were not sustainable in the current economic context.

But developments such as lower Saudi Arabian supply to oil companies, as reported by Reuters on Monday, unrest in Nigeria and higher-than-expected Chinese imports would support prices, Barclays Capital said in a report.