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Wed 1 Oct 2008 10:26 AM

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Oil extends gains on hopes of US bailout passing

Strong belief Congress will pass financial rescue plan sees oil rise to $102 a barrel.

Oil extends gains on hopes of US bailout passing
BAILOUT HOPE: The price of oil has risen to $102 a barrel. (Getty Images)

Oil extended the previous day's gains by another dollar on Wednesday to hover around $102 a barrel, buoyed by hopes that Washington would find a way to pass a rescue plan to head off a deep recession in the United States and abroad.

The US Senate agreed to vote on the bailout package on Wednesday night that will include an increase in the amount of bank deposits insured, a Senate aide said on Tuesday.

US light crude for November delivery rose $1.29 cents to $101.93 a barrel by 0530 GMT, after settling $4.27 higher at $100.64 on Tuesday in a relief rally. London Brent crude rose $1.18 cents to $99.35.

"There is a strong belief that the US Congress will pass the rescue plan in a few days, so that's supporting prices," said Ryuichi Sato, an analyst at Mizuho Corporate Bank in Tokyo.

"But the fundamentals for the US financial markets haven't changed so there is still a lot of downside risk in that regard."

Oil's rebound comes after its steep tumble on Monday, when it dropped $10.52 in the second-biggest fall since April 23, 2003, as fear gripped financial markets after US lawmakers rejected the $700 billion bailout plan.

But US stocks, the dollar and oil prices have since strengthened on renewed optimism that US lawmakers would soon reach a deal on a financial rescue plan.

Still, analysts said that expectations of a rise in US crude inventories, along with signs that the financial crisis has spread to Europe and is likely to erode energy demand further, would keep a check on prices.

"Prices over the coming months look vulnerable to further weakness, as sentiment continues to plummet on a weakening demand backdrop," said Mark Pervan, a resource analyst at Australia & New Zealand (ANZ) bank based in Melbourne.

A poll of analysts by newswire Reuters ahead of weekly US government inventory data due out on Wednesday predicted crude stockpiles in the world's top consumer rose 2.4 million barrels in the week to Sept. 26. Analysts forecast distillates fell by 1.2 million barrels while gasoline inventories were seen down 1.6 million barrels.

Oil has dropped from a record high $147.27 reached in July on signs that high energy prices and the financial crisis have cut into crude demand in top energy consumer the United States and as investors - who had rushed into commodities earlier this year as a hedge against inflation and the weak dollar - sold crude for safer havens.

A weaker economic growth outlook in Asia, where China's voracious energy demand has helped underpinned oil's gains in recent years, would also cast a pall over medium-term crude demand.

Asia's economic growth slowdown this year will be more severe than previously thought as the global financial crisis crimps exports, a Reuters polls show, with China's economic growth seen to slow to 9.9 percent this year, marking the first time since 2002 that the world's fastest-growing major economy has seen growth slip to single digits. (Reuters)

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