Oil Falls Most in Three-and-a-half Years

Oil prices tumbled by the biggest amount in three-and-a-half years in frantic trading today as dealers sold on fears of looming economic downturn in most major economies.

But the fall was not enough to overcome stock market fears about the British banking sector and the FTSE 100 suffered another sharp decline, to its lowest close since October 2005.

US crude futures slumped by over $10 at one point to just below $136 a barrel, having earlier traded as high at $146.73, less than $1 a barrel below the recent record high. It later recovered to above $137, however. London Brent fell $6.60 to $137.31 a barrel.

The sell-off was due to profit-taking after crude's recent surge and some relief that a strike by Brazilian oil workers was expected to have little impact on supplies.

A prediction from producers' cartel Opec, which pumps about 30% of world crude, that demand would recede in 2009 also undermined oil prices and offered a possible lifeline to many economies which have seen inflation shoot higher on surging oil and food prices.

The FTSE's fall, to 5,172, was partly due to falls in Shell and BP's share prices in response to weakening oil prices but the main culprit was falls in bank stocks after US Federal Reserve chairman Ben Bernanke warned that many markets remained under "considerable stress".

And legendary investor George Soros reiterated his view that the world was seeing "the most serious financial crisis of our lifetime". He added that the crisis with US mortgage giants Freddie Mac and Fannie Mae in recent days would not be the last of its kind.

Stock markets fell heavily in Europe and Asia too. "We're back into the panic mode we experienced back in mid-March. The distrust is at a very high level and it is totally justified," said Marie-Pierre Peillon, analyst at Groupama Asset Management in Paris.

"The US housing crisis is getting worse, and it has now spread from the 'subprime' segment to the 'prime' segment, with regional banks getting hit now," she added.

"What we're seeing today is a sudden panic from investors that their worst fears could be more than just nightmares," said David Evans, analyst at BetOnMarkets.com.

Henk Potts at Barclays agreed: "The reality is everyday investors are looking at... runaway inflation, falling house prices, weak business and consumer confidence surveys and that continues to sap away investors' confidence."

But later in the day the Dow Jones industrial average took cheer from lower oil prices and comments from Bernanke that the US banking system remained "well capitalized". The Dow rose 40 points, or 0.4%, to 11,098 while the Nasdaq technology index was up 1%.

Bad inflation numbers in Britain spooked the foreign exchanges with the pound jumping above the $2 level for the first time since March on the view that rising inflation would force the Bank of England to raise interest rates, thus increasing the attraction of holding pounds rather than dollars.

The dollar was also undermined by weak US retail sales figures and strong factory gate prices, both of which painted a stagflationary picture for the American economy. The greenback fell to a fresh record low against the euro of $1.604 as traders bet that the Federal Reserve was unlikely to raise interest rates any time soon whereas the European Central Bank just raised rates by a quarter point to 4.25%.

The US currency also slumped 1.4% against the Japanese yen, the biggest one-day fall since mid-March, to trade at 104.7 yen.

Gold had a rollercoaster day, first hitting a four-month high of $989.60 an ounce before retreating after Bernanke's comments to $976.