Doubts over U.S. Rescue Plan cause Oil to Fall Below $107

Oil dropped to below $107 a barrel on Friday, falling by more than $1. Uncertainty over the U.S. government's $700 billion rescue plan reversed the previous session's gains of more than $2.

Traders said oil's gains on Thursday were largely driven by news that U.S. lawmakers appeared close to a final agreement on the massive bailout plan, a deal that could help the world's largest energy-consuming nation avoid a deep recession that would cut deeply into fuel demand. However, bickering between Democrats and Republicans caused the bailout plan to stall on Thursday

NYMEX crude for November delivery fell $1.32, or 1.2 percent, to $106.70 a barrel by 0156 GMT, after rising $2.29 to settle at $108.02 on Thursday.

London Brent crude fell $1.13 or 1.1 percent to $103.47.

Oil has gained about 11% so far this year on geopolitical tensions between Iran and the West, supply disruptions in Nigeria and a falling U.S. dollar, but it is still 27 percent below the record price of over $147 hit in mid-July.

"Oil is down because traders are taking profits," said Ryuichi Sato, an analyst at Mizuho Corporate Bank in Tokyo.

"The delay in the bailout plan is bearish for crude markets. There is no confidence in the U.S. economy and traders are worries about the energy demand outlook."

Concerns about the weakening U.S. economy and increasing evidence of slowing fuel demand have pushed crude prices down from their record high.

A rescue for the U.S. financial system appeared in chaos on Thursday amid accusations Republican presidential candidate John McCain had scuppered the deal.

News that Washington Mutual was closed by U.S. authorities and its assets sold in America's biggest-ever bank failure also rattled the financial markets.

Separately, Shell Oil said on Thursday its Mars and several other Gulf of Mexico oil fields were expected to return online by the end of next week.

Although, nearly 60 percent of the crude oil production from the Gulf of Mexico remained shut because of the impact of hurricanes Gustav and Ike, the International Energy Agency said on Thursday it sees no need to release emergency supplies.

"We don't have to mobilise," IEA Executive Director Nobuo Tanaka said. "The market is now taking care of the current situation."

Author: Jo Amey