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Oil Prices Trade Lower A Day After Huge Rally

NEW YORK (AP) - Oil prices pulled back Tuesday after the
previous session's wild, record-setting rally, dropping below $107
a barrel as uncertainty over the U.S. financial bailout plan and a
stronger dollar led investors to shed commodities.

It was crude's first down session in five days. Some decline was
to be expected after crude soared 16 percent on Monday - the
biggest one-day gain ever - partly because of a technical fluke.

Still, oil market watchers say crude is showing early signs that
it may be poised for another big climb. They say tightening global
supplies, weakness in the dollar and nervousness about the U.S.
government's $700 billion financial rescue plan could soon prompt
edgy investors to shift funds out of equities and send a burst of
capital back into safe-haven commodities like oil - potentially
pushing prices back toward record levels and causing consumers more
pain at the pump.

Oil prices are up $15 in the past week, momentarily halting a
precipitous two-month slide from the all-time high of $147.27 a
barrel reached July 11.

"We could be back on the road toward $150 a barrel," said
Stephen Schork, an analyst and oil trader in Villanova, Pa. "If we
can't get any stability in the dollar and there's further weakening
in the economy, my fear is that it's deja vu all over again. We're
going to see a lot of money piled back into commodities as an
inflation hedge."

But highlighting the uncertainty in the oil market, other
analysts said it's just as possible that prices could go lower. If
the government's effort to absorb billions of dollars of bad
mortgages and other risky assets fails to stem the U.S. financial
crisis, the resulting blow to the economy could further curtail
energy demand in the world's thirstiest consumer.

Federal Reserve Chairman Ben Bernanke and Treasury Secretary
Henry Paulson on Tuesday urged Congress to quickly enact the plan,
but lawmakers in both parties demanded changes in the White
House-backed proposal.

"Even if this deal gets done, it's going to take time to have
an impact, and the real economy is far from being out of the
woods," suggesting U.S. energy demand will remain soft, said
Michael Wittner, global head of oil research at Societe Generale in
London.

Light, sweet crude for November delivery fell $2.76 to settle at
$106.61 on the New York Mercantile Exchange, after earlier dipping
as low as $104.05. The contract jumped $6.62 to settle at $109.37
on Monday.

A slightly stronger dollar weighed on crude prices, prompting
selling among investors who bought oil contracts as an inflation
hedge.

The October contract, which expired Monday, surged as much as
$25.45 to $130 a barrel before falling back to settle at $120.92,
up $16.37 - the biggest one-day gain ever.

Oil traders said the hyperbolic move was likely the result of an
unusually severe "short squeeze," a trading occurrence that
happens when investors who bet that oil prices would fall rush to
cover positions before the contract's expiration.

Speculation grew Tuesday that a big purchase of physical crude
may have forced the short-selling rally. Analyst said it appears
that a major energy firm faced with crude shortages after the
passage of Hurricanes Ike and Gustav was forced to step in at the
last minute and secure supplies before it ran out. That would have
sharply limited the number of Nymex oil contracts available for
short-sellers to buy, a sudden injection of scarcity that may have
helped drive prices skyward.

"I think one of the majors went off long contracts because they
needed the barrels. So all of the sudden there weren't as many
players available to sell," Schork said.

The extent of the rise stunned veteran oil market watchers and
prompted the U.S. Commodity Futures Trading Commission to open an
investigation into possible illegal manipulation.

Crude's climb over the past week comes amid a gradual shrinkage
in global oil output. OPEC's decision earlier this month to cut
production by 520,000 barrels a day, militant threats to Nigerian
oil supplies and output shutdowns and damage to oil installations
on the Gulf of Mexico coast caused by Ike and Gustav helped spark
the jump in oil prices from $90 a barrel last week.

Because of the supply squeeze, oil pricing appears to have
entered a trend known as "backwardization," analysts say, a trend
whereby front-month oil contracts, or oil available for purchase in
the near term, is being sold for more than contracts several months
out, suggesting the market is reacting to a coming supply crunch.

"The market is telling you that it's fearful about futures
supplies, so it's starting to place a premium on current oil
prices," Schork said.

A resurgence in crude prices would eventually lead to higher
pump prices, which have steadily fallen since jumping to a record
national average of $4.114 a gallon on July 17. A gallon of regular
shed about a penny overnight to a new national average of $3.726,
according to auto club AAA.

In other Nymex trading, heating oil futures fell 5.02 cents to
settle at $3.0132 a gallon, while gasoline futures lost 10.88 cents
to settle $2.595 a gallon. Natural gas futures jumped 20.1 cents to
settle at $8.144 per 1,000 cubic feet.

In London, November Brent crude fell $2.96 to settle at $103.08
a barrel on the ICE Futures exchange.

(Copyright 2008 by The Associated Press. All Rights Reserved.)


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