But the deal to rescue the faltering U.S. financial system stalled on Thursday amid bickering between Democrats and Republicans.

NYMEX crude for November delivery fell $1.32, or 1.2 percent, to $106.70 a barrel by 0156 GMT, after rising $2.29 to settle at $108.02 on Thursday.

London Brent crude fell $1.13 or 1.1 percent to $103.47.

Oil has gained about 11 percent so far this year on geopolitical tensions between Iranand the West, supply disruptions in Nigeria and a falling U.S. dollar, but it is still 27 percent below the record price of over $147 hit in mid-July.

“Oil is down because traders are taking profits,” said Ryuichi Sato, an analyst at Mizuho Corporate Bank in Tokyo.

“The delay in the bailout plan is bearish for crude markets. There is no confidence in the U.S. economy and traders are worries about the energy demand outlook.”

Concerns about the weakening U.S. economy and increasing evidence of slowing fuel demand have pushed crude prices down from their record high.

A rescue for the U.S. financial system appeared in chaos on Thursday amid accusations Republican presidential candidate John McCain had scuppered the deal.

News that Washington Mutual was closed by U.S. authorities and its assets sold in America’s biggest-ever bank failure also rattled the financial markets.

Separately, Shell Oil said on Thursday its Mars and several other Gulf of Mexico oilfields were expected to return online by the end of next week.

Although, nearly 60 percent of the crude oil production from the Gulf of Mexicoremained shut because of the impact of hurricanes Gustav and Ike, the International Energy Agency said on Thursday it sees no need to release emergency supplies.

“We don’t have to mobilize,” IEA Executive Director Nobuo Tanaka said. “The market is now taking care of the current situation.

The average price of unleaded regular dropped 1.3 cents to $3.726 a gallon, from $3.739 a gallon, according to the survey released Tuesday by motorist group AAA. While prices have now dropped some 13 cents and have stayed below the key $4 level for some time now.

But prices still remain much higher from a year ago, when gas was selling for less than $3 a gallon. Current prices are still about 33% higher from a year earlier at this time. Drivers can take some comfort in the fact that prices are 38.8 cents, or 9.4%, down from the record high price of $4.114 a gallon set on July 17.

Gas prices had been moving higher following the devastation left behind by hurricanes Ike and Gustav. With hurricane season is more than halfway done and the high summer driving season is over, the downward trend for gas prices may continue unless a major storm, once again, disrupts the flow of crude.

Oil prices had been moving lower since mid-July amid weakening demand, losing more than a third of its value since it reached a record of near $150 just two months ago.But crude prices rallied back Monday, posting the biggest one-day dollare gain ever as the dollar slumped on the government’s bailout plan and traders rushed to fill obligations as the October contract expired.

Crude for November deliver - the new front-month contrac - was sharply lower Tuesday, down $2.07 to $107.32 a barre. Meanwhile, only two states continue to report gas prices above $4 a gallon: Alaska and Georgia. Alaska continues to be the state with the most expensive gas prices, at $4.319 a gallon.

The cheapest gas can still be found in New Jersey, where gas cost $3.447 a gallon, according to AAA’s Web site

“We must act now to protect our nation’s economic health from serious risk,” Bush said at a White House press conference. “There will be ample opportunity to discuss the origins of this problems. Now is the time to solve it.”

“This is no time for partisanship,” Bush added. “We need to move urgently needed legislation as quickly as possible without adding controversial provisions that could delay action.”

Earlier, Paulson said that federal action would target the mortgage-related “illiquid assets” that are burdening the finance industry.

“The federal government must implement a program to remove these illiquid assets that are weighing down our financial institutions and threatening our economy,” said Paulson. “This troubled asset relief program must be properly designed and sufficiently large to have maximum impact.”

The new program would cost hundreds of billions of dollars, according to Paulson.
 

“This has got to be big enough to make a real difference,” he said.

The plan will be fleshed out in the coming days in meetings between Paulson, other Bush administration officials and lawmakers.

“I will spend the weekend working with members of Congress of both parties to examine approaches to alleviate the pressure of these bad loans on our system, so credit can flow once again to American consumers and companies,” Paulson said.

The mortgage plan is part of an extraordinary effort by the federal government to contain a financial crisis that has rocked Wall Street and has started rippling out to Main Street.

In the past week, two of the nation’s most venerable investment banks - Lehman Brothers and Merrill Lynch (MER, Fortune 500) - have fallen and the Federal Reserve was forced to lend $85 billion to prevent the sudden collapse of insurance giant American International Group .

Meanwhile, mainstay financial institutions are scrambling to raise cash or find merger partners as lending has frozen up and investor confidence has sunk.

In addition to the plan aimed at housing, the government on Friday announced a number of steps aimed more directly at investors and the stock markets.

The Treasury Department said it would insure money market mutual funds for finance firms that pay a fee to participate in a temporary program.

Bush said that “recent stresses cause some to question whether” money market deposits are safe. He said the plan will include government insurance for money markets.

“For every dollar invested in an insured fund, you’ll be able to take a dollar out,” Bush said.

Separately, the Securities and Exchange Commission took what it called “emergency action” and temporarily banned investors from short-selling 799 financial companies.

“What we had, in effect, was a dam that was sprouting lots of cracks and lots of leaks,” said Bernard Baumohl, chief global economist for The Economic Outlook Group. “For the last several days, the Federal Reserve and the Treasury were trying to plug each of these holes as they were appearing. What they decided to do today was to put up a whole new dam.”

This is the federal government’s most far-reaching intervention in the financial markets since the Great Depression of the 1930s.

“They did what they had to do,” said Baumohl. “They were facing a Category 5 financial hurricane that really threatened the entire global financial architecture.”

The downside to the plan is its enormous cost, said Baumohl, estimating that the federal bail-out of the financial markets could swell the national deficit to $1 trillion annually.

While the Federal Reserve had been tipped to leave rates on hold, analysts said a cut looked more likely after Lehman Brothers filed for bankruptcy.

The Fed has sought to soothe nerves and earlier injected $70bn  into markets to boost liquidity.

Central banks worldwide have faced the twin threat of quickening inflation and a wider economic slowdown.

“The downside risks to growth and the upside risks to inflation are both of significant concern to the committee,” the bank’s officials said.

Michael Wallace, an analyst at Action Economics said: “The Fed’s statement largely resisted market pressure for a more substantial capitulation.”

He said the assessment was “defiantly set at neutral”, in expressing worries about both slowing economic growth and inflation.

The decision to leave rates at 2%, as it has been since April, was a unanimous move.

US shares were volatile with the leading Dow Jones Industrial Average down 106 points to 10,811 after the news.

However, it later ended more than 140 points higher at 11,059.02 as investors interpreted the Fed’s decision as a sign that the economy was less fragile than some had feared.

Another factor boosting the market were reports that insurance giant AIG might be able to access a loan from the Federal Reserve, which would prevent the firm from collapsing.

Investment firm Lehman Brothers filed for bankruptcy on Monday, triggering market jitters and prompting a sharp fall in shares worldwide.

Fears have been raised that AIG could be the next firm to fold.

Serious risk

In light of such turmoil, certain traders had hoped the central bank would cut rates in a bid to boost the economy and warned that the Fed’s latest move could be seen negatively.

Ian Shepherdson, lead US economist at High Frequency Economics said: “Not to acknowledge the catastrophes of the next few days runs the very serious risk that the Fed will be seen as Nero, fiddling while Wall Street burns.”

While the Federal Reserve kept interest rates unchanged on Tuesday, it noted that stresses on financial markets had grown sharply and added that it would take further action if needed.

The central bank said “strains in financial markets have increased significantly and labour markets have weakened further”.

As the weekend drew to a close, the Federal Reserve announced plans to expand its lending to the banking industry in an effort to calm the markets. In addition, a consortium of 10 top domestic and foreign banks agreed to create a $70 billion fund that would serve as a lifeline for troubled financial firms.

The fate of Lehman, following weeks of speculation about its health, appeared grim after Bank of America (BAC,Fortune 500) and British bank Barclays (BCS), both viewed as potential “white knights,” pulled out of deal talks as of Sunday afternoon, according to sources.

A Lehman executive, who declined to be identified, toldFortune ”this looks like the end.”

Instead, Bank of America was reportedly in merger talkswith Merrill Lynch (MER, Fortune 500), according to news reports. Both the Wall Street Journal and the New York Times reported that a deal, which could be worth about $40 billion, could come as early as Sunday night.

Hours before Bank of America pulled out, Barclays had abandoned talks to buy Lehman (LEH, Fortune 500), a source close to the situation told CNNMoney.com.

Top Wall Street officials and federal regulators, who began meeting Friday, spent much of their Sunday at the Federal Reserve Bank of New York in the hopes of devising a plan to save Lehman and allay fears that threatened to roil U.S. financial markets Monday.

Meanwhile, broader efforts to tackle problems plaguing the entire industry are underway.

The Federal Reserve announced a series of steps to support the financial markets. The Fed said it would expand its short-term lending to banks by starting to take all investment-grade debt as collateral - instead of just Treasurys and other high-grade securities.

“The steps we are announcing today, along with significant commitments from the private sector, are intended to mitigate the potential risks and disruptions to markets,” said Fed Chairman Ben Bernanke.

Similarly, a group of 10 commercial and investment banks including, among others, Goldman Sachs (GS, Fortune 500), Citigroup, Barclays and Morgan Stanley, agreed to pony up $7 billion each to create a $70 billion lending facility that institutions facing liquidity issues could tap.

The measure would also help resolve exposure between Lehman Brothers and its counterparties, the companies said.

Treasury Secretary Henry Paulson, who has led efforts to help get the U.S. housing market and the broader economy back on track, applauded the plan and steps taken by regulators.

“These initiatives will be critical to facilitating liquid, smooth functioning markets, and addressing potential concerns in the credit markets,” Paulson said in a statement.

Yet the last-minute efforts provided little comfort to financial markets around the globe. As of Sunday evening, U.S. markets were headed for a steep selloff at the start of Monday’s session.

Futures in the Dow Jones industrial average, as well as the broader Nasdaq composite and the Standard & Poor’s 500 were as much as 3% lower, before paring some of their losses.

Investors already started piling into safe-haven Treasuries as the yield on the benchmark 10-year note dipped to 3.565% from 3.72% late Friday.

That nervousness also spread to the currency markets as the dollar eased against both the euro and the yen.

Adding to those concerns was news that insurance giant AIG (AIG, Fortune 500) planned to unveil a restructuring plan that will include the sale of part of its business to raise cash and boost investors’ confidence, according to a published report.

Investors are also likely to await more data about troubled savings and loan Washington Mutual (WM, Fortune 500), which sought to provide assurance about capital levels on Thursday.

What could help temper a market selloff is the widely-anticipated Bank of America-Merrill deal, said one expert.

“This sort of offsets the Lehman thing,” said Dan Alpert, managing director of the boutique New York City-based investment bank Westwood Capital. “But the reality is that it is just a short-term impact.”

Still, much of the market’s focus ahead of Monday was on the endgame for Lehman. The hope is that some solution can be agreed upon by early Monday morning in the U.S. - before financial markets open in Europe. Most Asian markets are closed for a holiday Monday.

But the abandonment of Barclays and Bank of America left a Lehman Brothers bankruptcy a very real threat. As of Sunday evening, the Wall Street firm was reportedly on the verge of filing for protection.

Separately, the International Swaps and Derivatives Association staged a special trading session so that big brokers could limit their Lehman Brothers risks.

The session was called “to reduce risk associated with a potential Lehman Brothers Holding Inc. bankruptcy,” according to a statement on the ISDA’s Web site.

Lehman - one of the nation’s largest and oldest investment banks - has suffered a dramatic and rapid descent. Its shares, which sold for as much as $67 in the past 12 months, have plummeted 94% this year and now trade at $3.65.

In the past six months, the company has reported $6.7 billion in losses due largely to bad bets on real estate. At the same time, concern is growing about problems throughout the financial sector.

A source with knowledge of this weekend’s meetings told CNN that representatives of several major financial institutions met with Paulson, Securities and Exchange Commission Chairman Christopher Cox and New York Federal Reserve Bank President Timothy Geithner to discuss Lehman and the volatile state of the financial markets.

On Saturday, several heads of big Wall Street banks, including Merrill Lynch CEO John Thain, were seen entering and leaving the offices of The Federal Reserve Bank of New York.

According to several reports, other financial firms were said to be reluctant to contributing their own funds to help keep Lehman’s more toxic assets afloat without the assurance that the government would backstop Lehman’s bad loans.

However, a source close to the situation told CNN Friday that the Treasury Department was adamantly against using any government money to help finance a takeover, restructuring or bailout of Lehman.

Top banking regulators, including the Federal Reserve, faced heavy criticism from lawmakers following the bailout of Bear Stearns in mid-March.

The Fed helped engineer a fire sale of the firm to JPMorgan Chase (JPM, Fortune 500), agreeing to put taxpayer funds at risk by guaranteeing $29 billion’s worth of potential losses on Bear Stearns’ portfolio.

The talks continued after what has been one of the most tumultuous weeks ever on Wall Street.

Things first started to unravel at Lehman Tuesday following reports that talks between the state-run Korea Development Bank, who was rumored to be interested in buying a stake in Lehman, had ended.

That, combined with the threat of a downgrade by some of the credit ratings agencies, led to a bloody sell-off in the firm’s stock.

Hoping to finally put all the rumors to rest, the company released its third-quarter results more than a week in advance on Wednesday, booking a nearly $4 billion loss and announcing a drastic restructuring plan. Investors were unconvinced though and the sell-off in Lehman shares continued, with the stock plunging 42% on Wednesday.

By Thursday evening, it was widely reported that Lehman was actively seeking a buyer for the entire firm. The company reportedly reached out to a number of suitors, including Bank of America and Barclays.

Speculation also surfaced Friday that J.C. Flowers & Co. and other private equity firms may bid for all or parts of Lehman. Current regulatory restrictions prevent buyout firms from owning a bank outright, although the Federal Reserve has eyed loosening those restrictions as bank failures pile up.

But as Friday wore on without any news of a deal, Lehman’s stock wound up falling another 13.5%. Shares plunged 77% over the course of the week, setting the stage for regulators to call upon banking executives to get together Friday night and begin talking about ways to hash out an end to the Lehman crisis.

If Lehman is sold or broken up, it would mark the end for one of Wall Street’s oldest and most well-known firms. Getting its start as a modest cotton-trading firm in Montgomery, Ala., in 1850 by German immigrant brothers Henry, Emanuel and Mayer Lehman, the firm saw its fortunes rose and fell along with the rest of Wall Street.

After World War II, Lehman’s profile grew as it advised such household American companies as Ford, Campbell Soup and Philip Morris on deals, before expanding overseas into Europe and Asia in the 1960s and 1970s.

The firm also became a breeding ground for high-profile dealmakers. Both Steve Schwarzman and Pete Peterson, co-founders of the private equity giant Blackstone Group, worked for Lehman in the early 1980s.

But Lehman’s rise was cut short in April of 1984, when the company agreed to be purchased by Shearson/American Express for $360 million. The company emerged independent just seven years later, albeit in much weaker shape than it was before.

It was around that time, however, that CEO Richard Fuld Jr., assumed the helm at Lehman and the firm went public after splitting off from American Express.

Known for his direct approach and staunch loyalty to the firm, Fuld transformed Lehman in the decade that followed from a lowly bond trading house into a worthy adversary of larger investment banks Goldman Sachs and Morgan Stanley.

Still there were bumps along the way for the long-time Lehman chief, including the Russian credit crisis and the painful collapse of the hedge fund Long-Term Capital Management in the late 1990s.

Fuld was quick to remind investors of those painful days and subsequent comeback during a conference call Wednesday, just after the company revealed its nearly $4 billion third-quarter loss.

“This firm has a history based on adversity and delivering,” said Fuld. “We have a long track record of pulling together when times are tough.”

After six years of steady decline, the U.S. currency is on a major upswing, fueled by fears of a global recession and a meltdown in financial markets.

The New York dollar index, a measure of the dollar’s value against the currencies of major trading partners, is up 14% off an all-time low set in the Bear Stearns panic.

The rally against the euro is even more striking: Just two months after it bottomed out at $1.60 to the euro, the dollar has jumped 13% against the European currency.

The reversal has been driven by a souring global economic picture and the flight of investors to safe U.S. Treasury securities from riskier assets such as stocks, corporate bonds and property.

The dollar’s renaissance is particularly remarkable, given that it comes as an already deeply indebted nation prepares to take on additional obligations in support of mortgage giants Fannie Mae (FNM, Fortune 500) and Freddie Mac (FRE, Fortune 500). The move has taken market watchers by storm.

“The speed of the rally has been really striking,” says Rebecca Patterson, global head of foreign exchange at J.P. Morgan’s Private Bank. She said she has been surprised at the currency’s steady rise in recent months, though she notes that many of the gains have come during August and September, which are traditionally volatile months in the currency markets.

Even so, the shift is remarkable because it comes as the U.S. economic outlook seems to dim by the hour. House prices are tumbling, joblessness is rising and the wheels are coming off the financial sector.

Last weekend the government effectively nationalized the mortgage business, via planned purchase of preferred stock in Fannie and Freddie, in a bid to quell worries stemming from the creaking housing market.

Since then, though, shares in firms such as Lehman Brothers (LEH, Fortune 500) and Washington Mutual (WM, Fortune 500) have gone into free fall, amid questions about their ability to raise new capital to offset mortgage-related losses.
 

Yet investors in currency markets are now focusing on the increasingly gloomy view overseas. The global growth story that appeared robust only six months ago now appears much less compelling.

National output declined in the second quarter in Europe, the U.K. and Japan, and central bankers in New Zealand this week made a deeper-than-expected cut in their policy rate in a bid to steer clear of recession. The prices of commodities such as oil, gold and grains are in free fall, signaling weakening demand even in fast-growing nations like China.

Currency traders are now betting those trends will have central bankers in other developed nations cutting interest rates, as much as they might prefer not to with inflation readings uncomfortably high.

“The dollar takes on the role of a safe haven currency,” writes CMC Markets currency strategist Ashraf Laidi, “as U.S. authorities have undertaken the most measures in stemming the deepening slowdown.”

And if U.S. growth prospects appear dim for the moment - Laidi expects the Fed to resume cutting interest rates as early as the fourth quarter, as financial sector weakness further impairs the rest of the economy - many of the worst-case scenarios that might presage a deeper dollar decline have failed to manifest themselves.

Patterson notes that even in August, as foreign central banks became net sellers of agency securities - those issued by Fannie, Freddie and the Federal Home Loan Banks - they increased their purchases of Treasury bonds, according to data from the Federal Reserve Bank of New York.

“Capital flows remain strong,” she says. That’s important because the U.S. needs to import billions of dollars in overseas capital every day. The current account deficit, the broadest measure of trade, was $176 billion in the first quarter, or 5% of gross domestic product, the Commerce Department said in June.

That said, while the prospect of rate cuts in Europe should mean the dollar remains strong in coming months, Patterson says she believes the currency is due for a round of profit-taking, at least.

A dollar selloff could be triggered by good news from emerging markets, she says, which might prompt Americans to invest more overseas, or by a spike in the price of oil. And the threat that foreign suppliers of credit to the U.S. economy might demand higher interest rates remains ever present.

What’s certain is that with the U.S. consumer retrenching after years of driving global growth, currency markets aren’t the only place where it’s a challenge to sort out all the moving parts.

When investors start figuring out how the parts of a rebalanced global economy might fit together, good news beyond a bounce in the dollar may finally come into view.

“It was once understood that the way the world works, in extremis, is that the U.S. taxpayer is there as buyer of last resort,” economist Jim Griffin writes in the ING Investment Weekly. “When we can come to understand the way the world works when U.S. financial limits are approached, it may then be possible to lift this morose market mood.”

By 10:00 A.M. ET, 13 of the 26 Texas refineries, representing a production capacity of 3.6 million barrels of fuel a day, had been shut down, the Energy Department said.

Texas accounts for more than a quarter of the nation’s total capacity to produce gasoline and other petroleum fuels. In normal operation, facilities there can produce up to 4.8 million barrels a day, according to the government.

Most of the Texas refineries are located along the ports of Houston, Port Arthur, and Corpus Christi, where Ike is scheduled to make landfall Friday night or Saturday.

Refining facilities on land are more vulnerable to flooding and power outages than offshore facilities, according to Ray Carbone, president of oil trading company Paramount Options.

“Without power, no refineries will be working and the flooding could complicate how long it takes them to come back online,” said Carbone.

“Close to 20% of the U.S. refining capability could be lost for a long period of time,” wrote Jim Rouiller, Senior Energy Meteorologist at Planalytics in an email. “Major and long term damage likely at the major refining cities from Galveston and Texas City northward to Baytown,” he wrote.
 

After Katrina, some refineries were shut down for 6 to 9 months, according to Tom Kloza, chief oil analyst for Oil Price Information Service.

All Texas ports from Freeport west to Louisiana were closed Friday as well, according to the Energy Department.

Much of the nation’s Gulf infrastructure had already been shut down or operating at minimal capacity due to Hurricane Gustav, which struck over Labor Day weekend.

However refineries in Louisiana that had been shut down due to the previous storm were in the process of re-starting or were already operating, the Energy Department said.

The refinery shutdowns drove up gas prices in the region.

Gas prices edged up nationwide by a fraction of a cent on Friday, to an average of $3.675 per gallon from $3.671 the prior day, according to the motorist group AAA. But in Houston, the increase was more dramatic, with the average gas price jumping more than 4 cents to $3.496.

Pipelines: All of the major crude and natural gas pipelines flowing out of the region had been completely or partially shut, the report said. The approach of Ike has caused many pipelines to declare “force majeure,” which frees them from delivery obligations in case the worst happens.

The 20 of the 38 natural gas pipelines in Ike’s path were confirmed shut down by the Energy Department at 12:00 p.m. ET, reducing capacity by 10.5 billion cubic feet per day. The shutdowns include facilities already in stand-by mode as a result of Hurricane Gustav.

The government also shut down Strategic Petroleum Reserve sites at Bryan Mound and Big Hill, Texas, and West Hackberry, La.

Offshore rigs: Evacuations also continued from oil rigs and platforms in the Gulf of Mexico, and from parts of coastal Texas, including Galveston and parts of Houston.

In the most recent figures available, the Minerals Management Service reported on Thursday that 562, or more than 78%, of the 717 manned production platforms in the Gulf had been evacuated, along with 93 of the 121 rigs.

But the real-time figure is likely higher, as all companies in the Gulf reported on Thursday that evacuations were either underway or completed. Many of the facilities were in the process of being restarted after Hurricane Gustav.

Some companies, such as BP (BP) and Chevron (CVX, Fortune 500), reported on Thursday that all evacuations of offshore facilities had been completed.

Chevron spokesman Mickey Driver said all 3,000 employees and contractors had been pulled out of the Gulf, where the company operates about 700 production facilities, including 400 manned platforms. It was still operating some unmanned facilities remotely.

The Commodity Futures Trading Commission released a much-anticipated report examining the activities of large index investors and so-called “swap” traders - those who trade on behalf of banks or wealthy individuals - in the commodity futures markets including crude oil.

“This preliminary survey is not able to accurately answer and quantify the amount of speculative trading occurring in the futures markets,” the report said. The problem is that the available data does not differentiate between speculative and legitimate hedge trading activities, it said.

The commission staff report recommended better classification of trading activities and improved market reporting requirements for large traders. The trading commission said it may also reclassify swap dealers under a separate category in its weekly reports to keep better track of potentially speculative trading activities.

Critics have blamed record crude prices on speculators who, unlike airlines and other industries that hedge fuel costs to protect against price spikes, have no implicit link to oil.

Earlier this week several senators who want Congress to impose new measures to control oil market speculation, released a private consultants’ report maintaining that speculation by large investors was a primary reason for oil prices to jump. The report said these investors poured $60 billion into oil market futures during the first five months of the year and since July have withdrawn $39 billion as oil prices declined.

But the trading commission staff report produced other data that suggests that speculation may not have had such a dramatic impact.

While oil prices rose significantly in the first six months of 2008 “the activity of commodity index trades during this period reflected a net decline of swap contracts as measured in standardized futures equivalents,” said the report.
 

Also, commodity index traders’ “long” positions - ones that anticipated prices would continue to rise - decreased by 45,000 contracts, or about 11%, on the New York Mercantile Exchange during the first six months of the year, the report said.

And during the period, the net nominal commodity index investment in oil futures rose in value about 30% from $39 billion to $51 billion, the report said, but this “appears to have resulted entirely from the increase in the price of oil” which jumped by 46% from $96 a barrel to $140 a barrel.

Acting Commission Chairman Walter Lukken, at a House Agriculture Committee hearing, said he saw no clear evidence that speculation had driven up oil prices or that there is a solid relationship between index trading and prices.

Oil prices fell Thursday, testing a 5-month low, as the market remained focused on slumping demand and the stronger dollar but also watched the threat that Hurricane Ike poses to the Texas Gulf Coast.

Crude futures traded down 94 cents at $101.64 a barrel, having been as low as $100.18 earlier.

On Wednesday, U.S. light sweet crude for October delivery settled down 68 cents to $102.58 a barrel, the lowest closing price since April 1.

Demand: Crude prices have fallen $45 from the record-high of $147.27 a barrel, set July 11, as the weakening global economy crippled demand for pricey energy. “The market has a very weak undertone. It is worried about global demand coupled with ample inventories,” said Andrew Lebow, a broker at MF Global in New York.

oil platform

There is “concern over the near-term economic outlook and the intermediate economic outlook,” said Lebow. “If the economy struggles, obviously, demand for petroleum will be negatively impacted.”

The concern over falling demand is not limited to the U.S. “Traders are worried about falling demand in Europe, South American and even Asia,” said Lebow. “And Asia has really been the engine of any demand growth.” With demand in a free fall, oil producers have decided to curb overproduction.

On Wednesday, the Organization of the Petroleum Exporting Countries announced that it would return to oil production levels from last September, about 28.8 million barrels of oil per day. Given that OPEC member countries have been overproducing, ignoring established quotas, the move by OPEC to adhere to those allotments means a decline of roughly 520,000 barrels of oil per day.

The government’s weekly supply report released Wednesday showed much larger-than-expected declines in both crude and gasoline stockpiles, which would normally push oil prices higher. But the market shrugged the report off to refocus on falling demand.

Tipping point: One analyst said the $45 drop in crude prices, coupled with fresh concerns over the financial sector, could invite investors back into the oil market.

“Demand has continued to fall but the price has continued to fall, too,” said Tom Orr, director of research at Weeden & Co. “You reach some point when that starts to even out.”

Given that oil “has gone from $147 to $102, you may be at a position to get a little bounce back,” said Orr. The $100 mark is a “tipping point” for the psychology of the oil market, he said.

Lehman Brothers (LEH, Fortune 500) reported a third-quarter loss of close to $4 billion and Goldman Sachs (GS,Fortune 500) downgraded the beleaguered stock to “neutral” from “buy.” The bank’s problems added fresh concerns to market’s concerns over the financial sector, and weighed on stocks Thursday.

“Some of the people that piled into the financials are probably getting back out of them and looking at the commodity trade,” said Orr.

Hurricane Ike: Ike was upgraded to a Category 2 storm, according to the National Hurricane Center, and “is forecast to become a major hurricane prior to reaching the coastline,” the Center said. The oil market watches storms in the Gulf closely because production facilities in the region account for about a quarter of U.S. crude oil production.

The Center said that with Ike moving over central and western Gulf of Mexico waters Thursday and Friday, the storm’s center will approach the northwest Gulf of Mexico coast late Friday. Forecasters say the storm is on track to hit the Texas coast, south of Galveston.
 

However, oil prices did not spike as Ike swirled in the Gulf, because Ike was not headed for Gulf production facilities. “We are missing the crude production areas and aiming for Refinery Row along the Texas Gulf Coast,” said Lebow.

Texas is home to 26 refineries, which can process almost 4.8 million barrels of crude per day, or one quarter of the nation’s total refining capacity, according to the Department of Energy. Most of Texas’ refineries are along the Texas Gulf Coast ports - Houston, Port Arthur, and Corpus Christi.

The region was still working to regain production capacity after Hurricane Gustav slammed Louisiana on Labor Day. However, with Ike now approaching with increasing intensity, oil and natural gas producers in the Gulf of Mexico have stopped sending workers back to the platforms, according to the Minerals Management Service (MMS).

The government agency, which tracks offshore operations, estimated that 452 of the 717 manned production platforms - about 63% - remained evacuated in the wake of Gustav. About 95.9% of oil production in the region had been shut down, according to MMS on Wednesday, citing energy company reports.

“It does not appear that (Ike) will be particularly damaging to production facilities,” said Orr. “Unless you get really a direct center hit, there isn’t much meaningful damage. There may be some supply disruption.”

Special trading session: In anticipation that Ike will rock the oil futures market, the Chicago Mercantile Exchange announced that it would hold a special, additional electronic trading session.

Globex trading for oil will begin on Sunday at 10 a.m. ET with a 9:30 a.m. pre-open. Typically, electronic trading on Sunday begins at 6 p.m. in time for early trading in Asia.

Retail gas prices: Even as crude oil prices ticked lower, gas prices at the pump increased for the second consecutive day, according to the Web site for motor advocacy group AAA. In some states where gas supplies depend on Gulf coast crude supplies, gas prices increased by more than they did nationwide.

The average price of regular unleaded gasoline increased 0.3 cent to $3.671 a gallon on a national level. In Texas, the projected landfall for Ike, gas prices jumped 0.5 cent to $3.537 a gallon. In Alabama, gas prices jumped 0.7 cent to $3.628 a gallon. In Arkansas, gas jumped 0.5 cent to $3.577 a gallon.

Robert Calmus from Marathon Oil (MRO, Fortune 500) said several of its Midwest refineries, which process crude oil into gas, were working on partial capacity because Gulf Coast crude delivery has not recovered to pre-Gustav levels.

Gas prices could continue to increase as Ike threatens Gulf crude delivery, according to Tom Kloza from Oil Price Information Service.

Instead, some on Wall Street said the housing sector is in as tough shape today as it was before Sunday’s rescue by the Treasury Department.

“This isn’t curing the patient. This is preventing the patient from developing a new problem he can’t survive,” said Barry Ritholtz, CEO and director of equity research, Fusion IQ.

Ritholtz and others pointed to a series of problems plaguing housing that the bailout of Fannie (FNM, Fortune 500) and Freddie (FRE, Fortune 500) does little, if anything, to address.

In particular, there is still a large supply of unsold homes on the market and an increasing number of foreclosures that threatens to add to the glut.

What’s more rising unemployment and increased job losses should add to the woes for lenders, brokers, builders and others tied to the housing sector.

“Now we have a recession,’” said Dean Baker, co-director of the Center for Economic and Policy Research.

Baker added that even with home prices declining at a rate not seen since the Great Depression, the housing bubble hasn’t completely deflated yet.

In fact, some argue that considering the rise in home prices during 1996 to 2006 when compared to inflation, incomes and rents during the same period, home values need to fall another 50% in order to get back to normal.

Still, the Fannie and Freddie rescue is likely to help bring mortgage rates down.

That’s because it should help lower the gap between mortgage rates and Treasury bills, a spread that had risen in recent months on investor concerns about the firms and the rising mortgage defaults.

Fannie and Freddie also warned last month that they would cut back on the growth of their mortgage loan portfolios as they tried to preserve the capital they would need to cover rising losses.

With the Treasury Department now standing behind the firm, most experts expect additional money will be made available to mortgage lenders.

Those two factors prompt some to believe that the rescue will be a significant help for housing markets, even if it doesn’t solve all the problems.

“You’re going to have to work through all those other issues in order for there to be a meaningful recovery,” said Timothy Speiss, head of the wealth management arm of accounting firm Eisner LLP. “But this is a significant step in the right direction: improving credit availability and affordability.”

Lawrence Yun, chief economist for the National Association of Realtors, said his group’s members are hoping lower rates will help change the attitude of potential buyers about whether it’s a safe time to re-enter the market.

“Whether it’s a game changer or not, we can’t say. We have to see how far rates fall, or whether or not they continue to lack confidence even with these low rates,” he said.

Thus, even if the bailout does have a positive impact on the real estate market, one economist said it will probably be limited and relatively slow to take effect.

“By no means is this a magic wand to rejuvenate the housing recession that has just entered its fourth year,” said Rich Yamarone, director of economic research at Argus Research