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Oil drops $4 on financial turmoil and Ike - update

Oil plunged $4 to below $97 a barrel on Monday as investors fled to safer havens due to turmoil in the US financial system and on early signs Hurricane Ike spared key US energy infrastructure.

Lehman Brothers filing for bankruptcy protection and Bank of America’s agreement to buy Merrill Lynch stirred concerns mounting global economic problems would slow energy demand further, sending investors out of oil and into safer havens.

US crude dropped $4.28 to $96.90 barrel by 11:24 a.m. after touching a nearly seventh-month low of $96.31 a barrel. US oil dropped below $100 briefly on Friday for the first time since early April, with trade open for a special session on Sunday due to Hurricane Ike. London Brent crude fell $3.83 to $93.75 a barrel.

Energy firms rushed to offshore facilities and coastal refineries to check for damage on Sunday after Hurricane Ike’s direct hit on the Houston energy hub left a quarter of US oil and refined fuel production idled and millions without power. Early reports from emergency officials and oil companies indicated little or no severe damage to energy infrastructure -- signaling a possible quick recovery to production -- though near-term supply problems were expected.

“The sell-off is partly because Hurricane Ike hasn’t done significant structural damage to oil facilities as well as growing concerns about the economy,” said David Moore, commodities strategist for Commonwealth Bank of Australia. “It has been quite a spectacular turn of events at Lehman and Merrill and the stresses in the financial system are sparking concerns about economic outlook and how that will weigh on global energy demand.”

High fuel prices and wider economic problems have dragged down oil demand in the United States and other large consumer nations, sending crude prices from a record high over $147 a barrel in July. Surging demand from emerging economies like China launched oil on a six-year rally, with additional support coming this year as investors rushed into oil as a hedge against inflation and the weak dollar.

The US dollar sank even as crude tumbled on Monday, with a broad flight from risk igniting US Treasury debt, gold and the low yielding Japanese yen. “The oil and dollar story seems to have changed,” said Michael Davies, analyst at Sucden. “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.”

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 oil installation on Monday in a third day of heavy fighting with security forces. (Reuters)