Fate of banks weigh on oil

Crude oil prices retreated Tuesday as fears about the global economy resurfaced following reports that European banks may have more risky government debt on their books than previously thought.

Benchmark crude for October delivery fell 51 cents to settle at US$74.09 a barrel on the New York Mercantile Exchange.

The Wall Street Journal reported that EU stress tests of 91 banks in July understated some lenders' holdings of potentially risky debt.

The Financial Times said Germany's top 10 banks will have to raise as much as US$135 billion to meet new capital requirements.

In addition, abundant supplies of oil will pull prices down over the next two months, with fewer US drivers on the road and the winter heating season still to come, MF Global analyst Andrew Lebow said.

The dollar's surge against the euro also was a factor in pushing down oil prices by making crude more expensive for investors trading in the weakening currencies.

The euro fell to US$1.2702 Tuesday from US$1.2877 late Monday in New York, while the British pound slumped to US$1.5344 from US$1.5399.

Oil has mostly traded in the mid-US$70s this summer as investors struggle to gauge how much global economic growth may slow in the second half and how much that will affect crude demand. Most analysts expect the US economy won't slip back into recession.

Crude prices were also under pressure from the lack of production disruptions in the Gulf of Mexico due to the weaker-than-expected hurricane season.

Analysts also noted the widening gap between the Nymex contract and Brent crude.

"We put this (Nymex) WTI price discount down to the oversupply on the US market, reflected in record-high stockpiles of crude and oil products," said a report from Commerzbank in Frankfurt.

"And it is also unlikely, given the dampened demand outlook in the USA, that the strong overhang will be reduced in the coming months."

Nymex prices were also under pressure from the lack of production disruptions in the Gulf of Mexico due to the weaker-than-expected hurricane season.

Still, weather factors were seen keeping a floor under prices for the rest of the month.

"We think hurricane activity should continue to keep oil prices relatively well bid at the US$70 mark despite the current sluggishness," said Edward Meir of MF Global in New York.

"However ... the market looks quite vulnerable going into the October time period, as hurricanes can no longer be counted on to provide support."

In other Nymex trading in October contracts, heating oil rose 1.70 cents to settle at US$2.0743 a gallon, gasoline gained 1.34 cents to settle at US$1.9329 a gallon and natural gas lost 8.7 cents to settle at US$3.852 per 1,000 cubic feet.

In London, Brent crude rose 87 cents to settle at US$77.74 a barrel on the ICE Futures exchange.

- AP