Oil rises to above US$83 as financial panic eases

By Carlo Piovano, The Associated Press

LONDON - Oil prices rose above US$83 a barrel on Tuesday in Europe on hopes the economic fallout from the financial crisis would be curbed by U.S. and European government pledges to pump capital into the banking sector.

Light, sweet crude for November delivery was up US$2.65 to US$83.84 a barrel in electronic trading on the New York Mercantile Exchange by midmorning in Europe. The contract rose overnight $3.49 to settle at $81.19.

Markets have cheered signs that governments plan to inject money into major banks in an effort to recapitalize the ailing sector. Tokyo's benchmark Nikkei 225 index jumped 14.25 per cent Tuesday - its largest ever one-day gain - after the Dow Jones industrial average on Monday rose over 11 per cent, its biggest daily rally since 1933.

"The bailout announcements have eased some of the deep-seated fear of a global meltdown and instilled a degree of confidence in markets," said Peter Luxton, analyst at Informa in London.

He warned, however, that oil prices are unlikely to rally much higher in coming days as doubts over global demand in the longer-term remain very much on traders' minds.

Oil fell to a 13-month low on Friday, settling at US$77.70. Crude is down 44 per cent since reaching a peak in mid-July as the credit crisis has steadily eroded the growth outlook for world economies.

To counter any further trouble in the banking sector, the U.S. plans to spend an initial $250 billion of a $700 billion bailout buying stock in private banks, industry and government officials said Monday night. President George W. Bush planned to announce the details later Tuesday.

That followed Monday's news that European governments were putting up over $2 trillion to safeguard their own banks and kick start credit markets back to life.

But analysts say the meltdown in financial markets may have already done its damage to global economic growth.

"The outlook for oil prices is still very much bearish as the risk of global recession - or at least a global slowdown - remains," said Luxton, who expects prices to drop to the $60 to $70 a barrel region next year.

He said prices may hover around the current levels until mid-November, when the OPEC meeting will be held. OPEC warned it intends to cut production to stop the decline in oil prices, but markets are uncertain how effective that will be.

"Demand is driving oil markets now," said Luxton.

He noted OPEC has a poor record of boosting prices with production cuts during economic downturns.

Meanwhile, other analysts are revising down forecasts. Goldman Sachs on Monday cut its year-end crude price forecast from US$115 a barrel to US$70.

In other Nymex trading, heating oil futures rose 5.28 cents to US$2.39 a gallon, while gasoline prices gained 6.44 cents to US$1.98 a gallon. Natural gas for November delivery rose 7.7 cents to US$6.77 per 1,000 cubic feet (28 cubic meters).

In London, November Brent crude rose US$2.92 to US$80.38 a barrel on the ICE Futures exchange.