Oil Prices Fall on Profit-taking after Huge Rally

NEW YORK - Oil prices swung lower Tuesday, falling below $109 a barrel as traders cashed in profits a day after crude rocketed to its biggest one-day gain ever — an epic rally apparently triggered in part by a technical fluke.

Still, oil market investors remain edgy as officials in Washington hash out details for a $700 billion plan aimed at rescuing the teetering U.S. financial system and averting an economic collapse. Investors are worried that the massive outlay of taxpayer money will lead to dramatically higher government borrowing — a move that could depress the dollar and spark another commodities bull-run.

Light, sweet crude for November delivery fell 78 cents to $108.59 in early trading on the New York Mercantile Exchange, after earlier dipping as low as $106.07. The contract jumped $6.62 to settle at $109.37 on Monday.

The October contract, which expired Monday, surged as much as $25.45 to $130 a barrel before falling back to settle at $120.92, up $16.37 — the biggest one-day gain ever.

Analysts said the hyperbolic move was likely the result of an unusually severe "short squeeze," a trading occurrence that happens when investors who bet that oil prices would fall rush to cover positions before the contract's expiration. Failure to do so would require them to take delivery of the physical crude; traders almost always cover their positions rather than take delivery, even if doing so means taking huge losses.

Tuesday's trading essentially brought prices back to where they were before the rally began, further suggesting it was the result of a technical phenomenon. Nonetheless, prices have moved higher over the past week amid greater uncertainty about the economy.

In Washington, Treasury Secretary Henry Paulson, Federal Reserve Chairman Ben Bernanke and Securities and Exchange Commission Chairman Christopher Cox appeared before Congress Tuesday morning to update lawmakers on the bailout plan, which would take hundreds of billions of dollars in bad mortgages and other risky assets off of banks' and brokers' books.

The Treasury Department's first draft said that only mortgage-related assets would be purchased. But in a later version, the Treasury secretary asked for the power to expand purchases to troubled assets beyond real estate.

That would conceivably leave taxpayers picking up the tab on things like bad car loans and credit card debt.

Democrats are calling for the measure to limit pay packages for executives of companies helped by the bailout and to allow judges to rewrite mortgages to lower the monthly payments of bankrupt homeowners.