Oil jumps above $108 on optimism of bailout deal

NEW YORK -- Oil prices bounced higher in erratic trading Thursday amid growing optimism that a U.S. economic rescue plan will win legislative approval and boost falling domestic energy demand.

Light, sweet crude for November delivery rose $2.37 to $108.10 a barrel in midday trading on the New York Mercantile Exchange after edging slightly lower for most of the morning. Oil shed 88 cents to settle at $105.73 on Wednesday.

Investors seemed hopeful that the government and lawmakers were closing in on a deal to approve a $700 billion plan aimed at saving the shaky U.S. financial system. President Bush strongly urged Congress to act quickly to pass a $700 billion financial industry bailout, warning Americans in a Wednesday night speech that failing to act fast risks dire economic consequences such as disappearing retirement savings, rising foreclosures, lost jobs and closed businesses.

Oil traders say the emergency measure could revive a sputtering economy and reverse steadily dwindling fuel consumption by American consumers and businesses. But others say the huge outlay of taxpayer money will also weigh on the dollar since the government would have to essentially print money to pay for the package -- an inflationary move likely to enhance the appeal of commodities like oil. Investor often buy commodities, which are known for holding their value, to hedge against a weak dollar.

"I think we're seeing some buying on expectations that the bailout will succeed," said Peter Beutel at Cameron Hanover, New Canaan, Conn. "They're buying for both reasons, that it could increase demand for crude and also that it's very inflationary, and the money has got to come from somewhere."

The credit crisis has prompted American consumers and business to cut back on energy consumption, sending demand for gasoline to levels sharply lower than a year ago. Still, some analysts have questioned whether the plan will be enough to energy demand to bounce back and say oil prices could be headed lower in the near-term.

"It's very difficult to justify $100 oil with the lack of demand in this economy," said Stephen Schork, an analyst and oil market trader in Villanova, Pa.

Underscoring the weak demand, pump prices continued falling across the country Thursday. A gallon of regular fell 1.5 cents overnight to a new national average of $3.70, according to auto club AAA. An increase in Gulf Coast refining operations following shutdowns caused by Hurricanes Ike and Gustav also pressured prices.

Oil companies are restaffing Gulf platforms and rigs after the storms plowed through the region, but most production remains offline. Nearly 63 percent of crude output and 57 percent of natural gas production was still shut-in as of Wednesday, the U.S. Minerals Management Service said.

Damage to U.S. Gulf Coast refineries prompted Mexican state oil company Pemex to reduce its daily output by 250,000 barrels a day. The company said it expects production to be back to normal by the end of the week.

OPEC's decision earlier this month to cut production by 520,000 barrels a day and militant threats to Nigerian oil operations have added to the supply shortage and have kept crude prices in check, analysts said.

Crude's recovery came despite a slightly stronger dollar, which inched higher against the 15-nation euro on Thursday. The euro bought $1.4656, down slightly from $1.4658 late Wednesday in New York. The dollar slipped to 105.89 Japanese yen from 105.93.

In other Nymex trading, heating oil futures for October delivery rose 4.75 cents to $3.0745 a gallon, while gasoline prices rose 7.08 cents to $2.6655 a gallon. Natural gas rose 16 cents to $8.068 per 1,000 cubic feet.

In London, November Brent crude fell 1.96 cents to $104.41 a barrel on the ICE Futures exchange.