Oil at 7-month low on Wall Street woes

Crude futures fall more than $4 a barrel as economic concerns fuel fears that demand for energy will not recover any time soon.

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By Catherine Clifford, CNNMoney.com staff writer

What should Federal Reserve policy makers do at Tuesday's meeting?
  • Lower rates
  • Hold rates steady, but hint at cuts
  • Hold rates steady, say inflation is worrisome
  • Raise rates

NEW YORK (CNNMoney.com) -- Oil prices settled at a seven-month low Tuesday as the meltdown on Wall Street pulled the oil market's focus to the economic slowdown that has already been cutting away at demand for energy.

Lehman Brothers (LEH, Fortune 500) filed for bankruptcy Monday, Merrill Lynch (MER, Fortune 500) agreed to be purchased by Bank of America (BAV) over the weekend, and American International Group (AIG, Fortune 500) continued to be hit by downgrades even as it struggles to come up with capital.

Oil closed $4.56 lower to $91.15 a barrel, after reaching as low as $90.51. Tuesday's settle was the lowest since Feb. 7, when oil closed at $88.11 a barrel.

On Monday, oil traded down $5.47, bringing the 2-day loss to $10.03.

"The sheer rise of oil as a financial instrument through July of this year is what pushed it higher, and it's now showing the other side of the same sword, with prices pushing lower," said Peter Beutel of energy risk management firm Cameron Hanover.

Beutel said oil prices would probably dip below $90 a barrel this week.

Slowdown cuts demand: Oil prices have fallen more than $56 from the record high price of $147.27 a barrel, set July 11. Prices have slid in recent months as the global slowdown has chipped away at demand, and the unprecedented implosion in the financial markets has cast more gloom over the oil market.

As the economy continues to deteriorate, so does demand for oil. And Wall Street's woes don't make it likely that demand will return to healthy levels any time soon.

The price of oil "is definitely not supply- and-demand related right now," said Neal Dingmann, senior energy analyst at Dahlman Rose. "It is clearly all demand related right now."

As Wall Street reeled Monday, stocks were battered. The Dow Jones industrial average shed 504 points, or 4.4%, which was the biggest one-day decline on a point basis since Sept. 17, 2001, when the market reopened for trading after having been closed in the aftermath of the 9/11 terrorist attacks. On Tuesday, Wall Street was much more subdued.

"When the stock market goes down like we have seen in the last day, commodity prices go down," said Mark Waggoner, president of Excel Futures.

Despite the fact that a major Hurricane barreled through the Gulf of Mexico, - leaving production limited, more than a dozen refineries shuttered, and gas stations without gas to pump - oil prices were still at 7-month lows, which shows "the severity of what is going on in the economy," said Dingmann.

Fed: Despite the recent tumult on Wall Street, Federal Reserve policy makers held their key interest rate steady at 2% at Tuesday's meeting. Oil prices were mostly unchanged after the announcement.

The Fed's decision to hold the key funds rate steady at 2%, while much of the market was looking for a rate cut, did not push oil prices outside of their range.

"If you look at where we were before the report and after the report, the price really did not change that much," said Waggoner. Oil prices "held pretty steady."

One analyst said the decision was a vote of confidence for the markets.

The Fed's "decision surely reflects confidence in the overall financial infrastructure but may reflect an even more strongly held confidence in the need for a strong dollar," said Dr. Larry G. Chorn, the chief economist at Platts, an energy research firm.

Ike: Hurricane Ike slammed the Gulf Coast of Texas on Saturday. The oil rigs and platforms in the Gulf were evacuated in advance of the storm and refineries were shuttered.

Hurricane Ike resulted in a decrease of 3.6 million barrels per day of refinery capacity, with 14 refineries in Texas and Louisiana shuttered, according to the Department of Energy.

An Energy Department official told pool reporters Tuesday that though damage to refineries was not as bad as initially feared, all Texas refineries remain shut down and will not be restored for at least a week.

"We do have some refineries hat took a pretty good bit of damage. There are at least a couple that will take a long time to come back up,'' said Kevin Kolevar, Assistant U.S. Secretary of Energy. "But generally speaking, the situation is much more positive than we had initially feared."

Meanwhile, 99.9% of crude production and 93.8% of natural gas production in the Gulf of Mexico was shuttered, as of Tuesday.

With production shuttered and tankers with oil imports not yet allowed to the ports, the Department of Energy said product supply could be constrained. As a result, shipments of imported oil have increased to make up for the drop in domestic supply.

MMS estimated that 498 of the 717 manned production platforms - about 69.5% - remained evacuated in the wake of Hurricane Gustav earlier this month and after Hurricane Ike, as of Tuesday.

"Although it was only a Category 2, it was a big, big storm," Waggoner said. "Some of these platforms are going to be virtually fine and some of them are going to have some major problems - but nobody knows yet." To top of page

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