Oil Rebounds after 2-day Tumble

(AP Photo/Frank Franklin II)

LONDON - Oil prices rebounded Wednesday as traders viewed a two-day $10 drop as overdone and driven more by recent market jitters than by fundamentals.

Sentiment got a boost on news that the U.S. Federal Reserve agreed to provide an $85 billion emergency loan to rescue insurance giant American International Group, helping stabilize global markets rattled by the failure of U.S. investment bank Lehman Brothers.

"Prices had really fallen off a cliff," said Peter McGuire, managing director at investment firm Commodity Warrants Australia in Sydney. "When a market falls 25 percent in 3 weeks and 40 percent in two months, it tends to find some support for a bounce back."

Light, sweet crude for October delivery rose $2.80 to $93.95 a barrel in electronic trading on the New York Mercantile Exchange by noon in Europe. Overnight, the contract fell $4.56 to settle at $91.15, after dropping $5.47 on Monday.

At one point Tuesday, oil touched $90.51 a barrel, its lowest since Feb. 8, and down 39 percent from a record $147.27 on July 11.

"Worries about the U.S. financial system, a lack of liquidity and fears for world oil demand all pressured the market," wrote analysts at JBC Energy in Vienna, Austria. But they added that a rebound in early trading Wednesday could be attributed to the Federal Reserve's decision to bail out AIG.

The Federal Reserve said in a statement Tuesday it determined that a disorderly failure of AIG could hurt financial markets already reeling from a yearlong credit crisis that led to the bankruptcy of investment bank Lehman Brothers earlier this week.

It also could have "lead to substantially higher borrowing costs, reduced household wealth and materially weaker economic performance," the Fed said.

The Fed said in return for the loan, the government will receive a 79.9 percent equity stake in AIG.

With so much uncertainty surrounding the U.S. financial system and fears that slowing economic growth will undermine crude demand, Wednesday's jump in oil prices probably hasn't broken the recent downward trend, McGuire said.

Events that would usually boost prices — such as OPEC cutting output by 520,000 barrels a day last week or damage to oil installations on the Texas coast by Hurricane Ike last weekend — haven't done so.

"The OPEC cut didn't have any impact," McGuire said. "Then Ike didn't slow the market either."

Investors were also waiting for the U.S. Energy Department's Energy Information Administration to release later in the day its report on U.S. oil stocks for the week ended Sept. 12. The petroleum supply report was expected to show that oil stocks fell 3.7 million barrels, according to the average of analysts' estimates in a survey by energy information provider Platts.

The Platts survey also showed that analysts projected gasoline inventories fell 3.6 million barrels and distillates went down 1.7 million barrels during last week.

Violence continued Wednesday across Nigeria's restive Niger Delta oil region. Nigeria's main militant group said Wednesday it destroyed an oil-pumping station and a pipeline that crosses southern Nigeria, extending a spate of violence into its fifth day.

The Movement for the Emancipation of the Niger Delta also said earlier it attacked an oil-pumping station overnight, battling with security forces protecting the so-called flow station run by the local unit of Royal Dutch Shell PLC and destroying the site. Military spokesman Lt. Col. Sagir Musa confirmed the attack, but had no details. Shell officials had no immediate comment.

In other Nymex trading, heating oil futures rose 4.96 cents to $2.769 a gallon, while gasoline prices climbed 5.03 cents to $2.4511 a gallon. Natural gas for October delivery added 13.9 cents to $7.418 per 1,000 cubic feet.

In London, October Brent crude rose $2.42 to $91.64 a barrel on the ICE Futures exchange.