Oil rebounds over $3 after sell-off on AIG rescue

SINGAPORE: Oil rebounded more than $3 a barrel on Wednesday, after two days of free fall, as an $85 billion bailout of American International Group sparked a relief rally on Wall Street. Supply disruptions in the United States after Hurricane Ike crashed through the Gulf of Mexico last week and attacks on Nigerian oil installations also supported prices.

Oil futures are little changed from the start of the year but more than 35 percent lower than the record high above $147 hit in mid-July. U.S. light crude for October delivery rebounded $3.15 to $94.30 a barrel at 0123 GMT after falling as low as $90.51, a seven-month low, a day earlier in a broad cross-market sell-off.

The contract at some point this week was down more than $10 a barrel from Friday's close. London Brent crude for November delivery climbed $3.54 to $92.76 at the same time. "Everyone feared there would be a big meltdown in the financial sector that would affect the economy. Now they are hoping we'll just get through the AIG situation and that may be lifting the market," said Anthony Nunan, a risk management executive at Tokyo-based Mitsubishi Corp.

"Structurally, there's a much bigger supply problem. But if demand falls faster than supply is eroded, prices will fall as well." The U.S. government agreed to rescue insurer AIG with an $85 billion loan from the New York Federal Reserve, preventing the world's biggest corporate bankruptcy just days after investment bank Lehman's collapse this week threw global markets into turmoil.

The upheaval in the U.S. financial system led global markets into free-fall this week, sending oil tumbling to a seven-month low, or down some $10 since the start of the week as investors fled into safe-haven assets, such as gold and bonds. Attacks this week on two oil installations in the Niger Delta, in the heaviest fighting there in two years, also helped prices after investors sidelined them to focus on the credit crunch earlier this week.

And Hurricane Ike toppled several oil and natural gas production platforms in the Gulf of Mexico, signalling that a full recovery of output from the region could be slow. Threats from hurricanes since late August have already cut more than 20 million barrels of oil supply from the Gulf and idled a quarter of U.S. refinery capacity, digging into supplies and sending gasoline prices up at U.S. pumps. U.S. gasoline stockpiles are already running at their lowest level since November 2000, and could drop to their lowest on record due to the effects of Ike, according to a Reuters poll of analysts. The EIA data are due later on Wednesday.