Posted 9/16/08 - Oil prices extended their steep losses Tuesday, tumbling below $92 a barrel as a worsening economy suggested U.S. energy demand will keep falling despite crude's return to year-ago levels.

Gas prices edged higher at the pump, topping $3.85 a gallon amid the aftermath of Hurricane Ike. However, given crude's continuing slide, retail gas was expected to turn lower within a few weeks.

As conditions on Wall Street deteriorated, evidence mounted that U.S. consumers and businesses were bracing for a protracted economic downturn that should guarantee more of the money-saving energy conservation measures of the past year: Americans will cut back on driving, airlines will keep fewer planes in the air and U.S. manufacturers will be shipping fewer products. That in turn was expected to keep crude prices down.

"The economic slowdown is completely unavoidable now and people will be driving less, trucking less and buying less," said James Cordier, president of Tampa, Fla.-based trading firms Liberty Trading Group and OptionSellers.com. "Energy consumption will fall dramatically."

Light, sweet crude for October delivery fell $4.31 to $91.40 a barrel on the New York Mercantile Exchange, after earlier dipping to $90.55, its lowest level since Feb. 8. On Monday, prices closed below $100 for the first time in six months, shedding more than $5 and wiping out all of oil's gains for the year.

Crude has fallen $55 - or 37 percent - since shooting above $147 on July 11.

Oil's steep correction comes as traders closely watched rapidly unfolding events on Wall Street. Fears mounted Tuesday about the health of insurance giant American International Group Inc. after several ratings agencies reduced their ratings on the company. That amplified worries of more turmoil a day after Lehman Brothers Holdings Inc. filed for bankruptcy and Merrill Lynch & Co. was bought by Bank of America Corp. in a rush sale intended to save the troubled company.

Analysts say another big round of commodities liquidation may be in the offing as Lehman, a major player in commodities, moves to unwind its positions to raise capital. Others big banks, institutional investors and hedge funds may follow suit on worries that the downward momentum on oil and other commodities may have reached a tipping point where prices will not rebound.

"It's like a snowball effect," said Cordier. "The unwinding of all this debt is getting oil prices to go to these levels much quicker than people thought possible."

Also pressuring crude prices was a decision Tuesday by the Federal Reserve to hold interest rates steady. Investors viewed the move as another drag on oil; lower interest rates would likely have depressed the dollar, potentially sending the price of oil and other commodities higher if investors had shifted money into hard assets to hedge against inflation.

But analysts said the biggest weight on oil prices was the slumping economy and continuing demand destruction. On Tuesday, computer maker Dell Inc. said it sees "further softening" in demand for information technology products around the world. That means the company will likely be shipping less products around the globe, further reducing demand for fuel.

Meanwhile, pump prices edged higher Tuesday due to Gulf Coast refinery shutdowns after Hurricane Ike slammed into Texas over the weekend. A gallon of regular jumped more than a penny overnight to a new national average of $3.854, according to auto club AAA, the Oil Price Information Service and Wright Express. Prices topped $4 a gallon in parts of Alabama, Illinois, Kentucky and Tennessee.

Virtually all oil production in the Gulf and about 94 percent of natural gas output remained shut down after the passage of Ike and Hurricane Gustav last month, according to the U.S. Minerals Management Service.

Crude fell despite an attack by militants on an oil-pumping station operated by the local unit of Royal Dutch Shell PLC in southern Nigeria with dynamite and other explosives Monday which killed at least one guard in the third day of heavy battles between the armed forces and militants fighters.

Shell said one guard died and four others suffered injuries in the battle, which prompted an evacuation of some facilities in the southern region. No details were given about any effect on oil production.

"When you start to see the market not paying attention to what's going on around it, the fundamentals are not being closely looked at," said Jonathan Kornafel, Asia director for market maker Hudson Capital Energy in Singapore.

In other Nymex trading, heating oil futures fell 6.82 cents to $2.723 a gallon, while gasoline prices dropped 14.14 cents to $2.42 a gallon. Natural gas for October delivery fell 6.4 cents to $7.306 per 1,000 cubic feet.

In London, November Brent crude fell $3.92 to $90.33 a barrel on the ICE Futures exchange.