Oil prices plunge on fiscal fears

NEW YORK -- Oil prices plunged Monday, pulling back at least temporarily from record levels as investors feared that the financial crisis that forced the sale of Bear Stearns Cos. is a sign of deep economic trouble.

Crude's plunge came even as diesel prices rose to a new record above $4 a gallon, and gas prices remained high. Diesel, used to transport the vast majority of the nation's goods, rose 1.3 cents to a national average of $4.002 a gallon Monday, according to AAA and the Oil Price Information Service. The national average price of a gallon of gas, meanwhile, dipped slightly to $3.283 a gallon, but remains 73 cents higher than a year ago.

Oil's steep decline -- falling $4.53 to settle at $105.68 a barrel on the New York Mercantile Exchange -- came hours after futures reached a new trading high of $111.80 on the Federal Reserve's move Sunday to lower a key interest rate by a quarter point.

In the past several months, Fed rate cuts have fed rallies in oil prices. Crude futures offer a hedge against a falling dollar, and oil futures bought and sold in dollars are more attractive to foreign investors when the dollar is down. Interest rate cuts, and even the prospect of future cuts, tend to weaken the dollar further.

But the mass selling Monday could be a sign that the oil market's momentum has turned negative, analysts say.

"People are saying, 'well, things are a lot worse than we thought,' " said Phil Flynn, an analyst at Alaron Trading Corp. in Chicago.

During much of oil's recent rally, the market shrugged off signs of economic weakness as investors bet that the Fed's rate cuts would continue, further weakening the dollar and drawing fresh investing into oil futures. On Monday, that changed.

"Seemingly, recession fears overrode the effect of the slumping dollar," said Eric Wittenauer, an analyst at A.G. Edwards & Sons Inc., in a research note.

Since oil moved above $100 a barrel last month, a growing number of analysts have argued that oil prices are in a bubble. Several forecasters have lowered demand growth predictions for this year, while supplies have grown.

"The fundamentals of the oil market didn't support the prices we had to begin with," said Addison Armstrong, director at TFS Energy Futures LLC in Stamford, Conn.

A retreat in the oil market could spell relief for consumers.