Oil drops 8 percent as global markets tumble

Reuters - Monday, September 29 05:58 pm

NEW YORK (Reuters) - Oil prices dropped nearly 8 percent to below $99 a barrel on Monday on signs the financial crisis was spreading beyond the United States to Europe.

U.S. crude fell $8.40 to $98.49 a barrel by 5:28 p.m. British time, after touching a session low of $97.95, while London Brent crude traded down $7.63 to $95.91 a barrel.

World stocks tumbled on Monday as three European banks became the latest casualties of spreading credit strife, forcing partial nationalizations and overshadowing Washington's bailout plan.

U.S. regional bank Wachovia Corp succumbed to the credit crisis on Monday and authorities stepped in to rescue three European banks as U.S. lawmakers prepared to vote on the $700 billion (389 billion pound) financial bailout scheme.

The mounting economic crisis has stirred concerns about oil demand, helping to drag prices from a record high above $147 a barrel in July.

"The spread of credit problems to European banks and slumping consumer business and consumer confidence there is raising concerns that demand for crude and refined products will begin to drop off, as it has in the U.S.," Addision Armstrong, analyst at Tradition Energy, said in a note.

The dollar also extended losses against the yen on Monday as questions remained over the ability of the plan to restore confidence to shaky markets and head off a deep recession.

U.S. congressional leaders from the Republican and Democratic parties said they had reached a tentative agreement on the bailout plan on Sunday and prepared to vote on it on Monday.

"From a commodity perspective, our more pressing concern is to what extent the U.S. virus spreads globally and, specifically, to China," Deutsche Bank said in a research note. "We expect demand destruction fears into early 2009 will bear down on many commodity prices."

The slow pace of recovery following shutdowns due to hurricanes in oil and gas production in the U.S. Gulf of Mexico, home to a quarter of U.S. output, could offer some support for prices in the short term.

Iran, the world's fourth-largest exporter of oil, avoided new sanctions in a United Nations vote over the weekend.

The U.N. Security Council unanimously passed a resolution on Saturday that again ordered Iran to halt its nuclear enrichment work, but it imposed none of the new sanctions Washington and its allies wanted.

Political tension over Iran's nuclear program was one of the factors that helped drive oil higher this year.

(Reporting by Matthew Robinson in New York; Additional reporting by Fayen Wong in Perth; Jane Merriman and Alex Lawler in London; Editing by Walter Bagley)

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