Oil falls below $78 on recession fears

Oil prices fell below $78 a barrel Wednesday in Asia on concern a massive bank bailout by the U.S. 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 98 cents to $77.65 a barrel in electronic trading on the New York Mercantile Exchange by midafternoon in Singapore. The contract fell overnight $2.56 to settle at $78.63. Oil prices have fallen by 47 percent since peaking near $150 a barrel in mid-July.

"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 U.S. plans to spend as much as $250 billion this year of a $700 billion bailout buying stock in private banks, President George W. Bush said Tuesday. Governments across the globe have pledged more than $3 trillion to prop up ailing banks in a bid to stabilize a credit crisis that began last year in the U.S. sub-prime mortgage market. Former U.S. Federal Reserve Chairman Paul Volcker said Tuesday the U.S. 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 U.S. demand in the weekly oil inventories report to be released Thursday from the U.S. 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 rose 2.26 cents to $2.2823 a gallon, while gasoline prices fell 0.34 cent to $1.8814 a gallon. Natural gas for November delivery rose 0.05 cent to $6.732 per 1,000 cubic feet.

In London, November Brent crude was down 84 cents to $73.69 a barrel on the ICE Futures exchange.

Source: Associated Press