Oil rallies as dollar weakens

Oil prices rallied Wednesday - ahead of the government's weekly supply report - as the dollar weakened against major currencies and a couple of battered financial institutions received assistance.
Oil traded up $2.74 to $93.89 a barrel after reaching as high as $95 earlier in the session. On Tuesday, oil closed $4.56 lower to $91.15 a barrel, which was the lowest settle since Feb. 7.
Crude futures are traded in U.S. currency around the globe, and so when the dollar loses ground against major currencies, oil prices increase. The dollar was lower against the euro, yen and pound.
On Monday and Tuesday, oil prices tumbled $10 to a 7-month low as an implosion of Wall Street sent shivers through the oil market because demand for energy can not recover in a staggering economy.
After the recent selloff, the oil market saw a rebound because prices "have come down too far too fast," said James Cordier, Portfolio Manager of OptionSellers.com.
Wall Street: In the recent sessions, the oil market has been directed by the sentiment on Wall Street.
"As the stock market weakens, the idea is that the demand for oil is going to weaken," said Cordier.
"There is no longer supply risk. It is all about demand," he addedr. "And demand is just falling off the table."
The Federal Reserve Board said late Tuesday it would lend as much as $85 billion to insurer American International Group (AIG, Fortune 500), which had been scrambling to come up with capital.
"There is a domino effect," said Phil Flynn, senior market analyst at Alaron Trading, and if AIG had been allowed to topple, commodity prices could have been pushed lower in the ensuing selloff.
Cordier said the fact that other banks were not able to salvage AIG was a negative sign for the markets.
"How AIG was bailed out speaks volumes about the fact that banks who had the most to lose if AIG failed had not one dollar to put into this," he said.
"That leads us to believe that there are more bad news to come," added Cordier. "Had AIG been the last of the shoes to drop, you would have seen banks stepping up."
British bank Barclays said Tuesday it was going to buy certain units of Lehman Brothers for $1.75 billion. Lehman Brothers (LEH, Fortune 500) was forced to declare bankruptcy in the wee hours of Monday after a weekend of failed negotiations.
Morgan Stanley (MS, Fortune 500) reported much better-than-expected results late Tuesday, giving a much-needed confidence boost to the financial sector.
Supply report: The oil market was waiting for the government's weekly supply report for the week ended Sept. 12, when the Gulf Coast of Mexico was shutting down in preparation for Hurricane Ike as it was only just recovering from the forces of Hurricane Gustav.
Analysts had forecast that crude oil stocks would be down by 3.7 million barrels, according to a consensus estimate of industry analysts surveyed by Platts, a global energy information provider.
Gasoline stockpiles were expected to fall by 3.6 million barrels, according to the survey by Platts. Distillates, used to make heating oil and diesel fuel, were expected to fall by 1.7 million barrels. Refinery capacity was expected to drop 0.5 percentage point to 77.8%.
Ike: Hurricane Ike slammed the Texas Gulf Coast as a Category 2 storm on Saturday. In advance of the storm, rigs were evacuated and refineries were shut down.
The storm resulted in a decrease of 3 million barrels per day of refinery capacity, with 12 refineries in Texas and Louisiana shuttered, according to the Department of Energy. Two refineries that had been closed for Ike were restarting as of Tuesday.
Refineries process crude oil into usable products, such as gasoline. Kevin Kolevar, assistant energy secretary, told reporters Tuesday the refineries in Texas will be out for another week, but that Ike caused less overall damage than was feared.
Meanwhile, 97.2% of crude production and 84.2% of natural gas production in the Gulf of Mexico were shuttered, as of Tuesday afternoon. Due to the drop off in crude in the Gulf, the Energy Department said imports have increased to compensate.
Energy bill: On Tuesday, the House of Representatives passed a bill that would permit offshore oil drilling by a vote of 236-189. The bill would allow drilling between 50 and 100 miles offshore. The Senate will vote on a drilling bill as early as this week.
Flynn said he doesn't expect the energy bill to affect the oil market in the near term.