Oil Falls Most in 3 Years

Crude oil tumbled the most in three years on concern that a slower U.S. economy will curtail demand for oil and gasoline.

Oil futures dropped, and U.S. stocks retreated as investors lost confidence in the government's rescue of Fannie Mae and Freddie Mac, which fell more than 30 percent each. Federal Reserve Chairman Ben S. Bernanke, in testimony to the Senate Banking Committee, said risks to growth and inflation have risen.

Crude oil for August delivery fell $6.75, or 4.7 percent, to $138.43 a barrel at 12:05 p.m. on the New York Mercantile Exchange. It was the biggest drop since April 27, 2005. Oil fell as much as $9.26 to $135.92. Futures reached a record $147.27 a barrel on July 11 and have risen 85 percent in the past year.

Fannie Mae and Freddie Mac plunged as Moody's Investors Service cut the financial strength ratings of the biggest U.S. mortgage-finance companies and said credit losses jeopardize dividend payments.

Fannie Mae dropped as much as 30 percent in New York and Freddie Mac declined 34 percent, as investors lost confidence that U.S. Treasury Secretary Henry Paulson's plan to avert the collapse of the mortgage firms will rescue shareholders.

Citigroup Inc., the biggest U.S. bank, fell to the lowest level in New York trading since the company was created through a merger in October 1998 on concern earnings prospects won't rebound in coming quarters.

Earlier, oil rose amid an expectation that the dollar's drop against the euro would boost the appeal of crude as a currency hedge.

The dollar fell to an all-time low of $1.6038 per euro in London from $1.5908 yesterday. The rising appeal of commodities caused by the declining value of the dollar has outweighed concern that an economic slowdown in developed countries will cut demand for oil.

The Organization of Petroleum Exporting Countries, which supplies about 40 percent of the world's oil, said it expects demand for its members' crude will fall next year as the global economy slows. The so-called call on OPEC crude next year will average 31.2 million barrels a day, a drop of 710,000 barrels a day from the forecast for 2008, the group said in its monthly oil market report today.

TradingEconomics.com, Bloomberg
7/15/2008 10:42:30 AM