Oil prices slip on fresh demand worries

Oil prices retreated Friday as the largest bank failure in the nation's history and uncertainty about the fate of the $700 billion bailout raised fresh concerns about the economy.

As Wall Street buckles, without clarity as to when relief should arrive from Washington, and the economy continues to sag, demand for oil will remain weak, sending oil prices lower.

Oil eased $2.46 to $105.56 a barrel. On Thursday, crude futures for November delivery settled up $2.29 to $108.02 a barrel on the New York Mercantile Exchange as the oil market focused on the way that the bailout plan would work to devalue the dollar.

Crude oil is traded in U.S. currency around the world, and so a devalued dollar means that crude oil becomes more expensive in dollar terms.

But as oil prices resumed their slide Friday, inflationary concerns took a back seat to the continued collapse of the economy, which was initially weakened by the meltdown of the housing industry.

Federal regulators seized Washington Mutual (WM, Fortune 500) and announced Thursday night that JP Morgan Chase (JPM, Fortune 500) had acquired the bank's $307 billion in assets and $188 billion in deposits. The acquisition marks another sting in a biting chain of failures on Wall Street in the past couple weeks, pulling into focus just how weak the U.S. economy has become.

There were hopes that the $700 billion bailout plan that President Bush announced Saturday in an attempt to loosen credit on Wall Street would be passed quickly. However, a proposed settlement fell through Thursday when Congressional Republicans raised objections.

The heated disagreements across party lines and the inability of key lawmakers to reach an agreement was one more sign that the already beleaguered economy may have to weather through a prolonged period of distress. On Friday, President Bush made a brief televised statement promising a rescue plan will pass..

The longer the economy remains under high stress and credit markets stay frozen, the weaker demand for oil becomes.

Oil hit a record high of $147.27 a barrel on July 11, but has fallen more than $40 since as weak demand has overpowered otherwise significant supply concerns.

Hurricanes Gustav and Ike both smashed through the Gulf of Mexico, shutting down the production and refinery rich region for a period. Recovery in the region has been slow.

And violence in Nigeria has continued, threatening pipelines and limiting oil production from the region.