September 15, 2008 / 2:28 AM / 11 years ago

Oil down $5 on financial turmoil

NEW YORK (Reuters) - Oil dropped more than $5 on Monday as investors fled to safer havens due to turmoil in the U.S. financial system and on early signs Hurricane Ike had spared key U.S. energy infrastructure.

Traders work in the oil options pit at the New York Mercantile Exchange, September 15, 2008. REUTERS/Chip East

Lehman Brothers’ LEH.N filing for bankruptcy protection and Bank of America’s (BAC.N) agreement to buy Merrill Lynch MER.N stirred concerns that mounting global economic problems would slow energy demand further, sending investors out of oil.

U.S. crude dropped $5.47 to $95.71 a barrel at 1828 GMT, after hitting a seven-month low of $94.13 and extending a 34 percent slide from peaks in mid-July amid mounting evidence of slowing fuel demand.

London Brent crude fell $5.55 to $92.03 a barrel.

“Oil sold off in the aftermath of the collapse of Lehman Brothers and the buyout of Merrill Lynch,” said Phil Flynn, an analyst at Alaron Trading in Chicago. He said news that damage from Hurricane Ike was not as bad as feared also pressured prices.

Oil companies rushed to check damage to their facilities after Hurricane Ike struck the heart of the U.S. energy industry near Houston on Saturday, leaving a quarter of the nation’s oil and refined fuel production idled.

Early indications showed no major damage to energy infrastructure, though several Texas refineries remained without power. The U.S. Department of Energy said plants suffered minimal damage and were preparing to restart.

U.S. stock markets fell after news of the Lehman bankruptcy and as investors waited for insurer American International Group (AIG.N) to announce a survival plan as it tries to avoid becoming the next casualty of the credit crunch.

BEARISH SENTIMENT

Oil had been on a six-year rally driven by surging demand from emerging economies like China, with additional support coming this year as investors rushed into oil as a hedge against inflation and the weak dollar.

But the dollar has been rebounding in recent months, and rose further on Monday amid a broad flight from risk igniting U.S. Treasury debt, gold and the low yielding Japanese yen.

“While the flight to quality has seen gold move up today, oil doesn’t seem to be getting used as a hedge at the moment, as the sentiment in the market is still bearish,” said Michael Davies, analyst at Sucden.

China’s central bank cut the cost of bank loans for the first time since February 2002 to prop up the slowing economy.

Militants in OPEC member Nigeria attacked a Royal Dutch Shell (RDSa.L) oil installation on Monday in a third day of heavy fighting with security forces.

Reporting by Rebekah Kebede in New York, Matthew Robinson and David Sheppard in London, Fayen Wong in Perth, Richard Valdmanis in New York, editing by Matthew Lewis

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