Oil edged lower on Friday as the crisis in world credit markets weighed on investor sentiment, but a late rally after central banks plowed more cash into the financial system erased most of the day's losses.
U.S. light, sweet crude (delayed) settled down 12 cents at $71.47 after falling as low as $70.10 as investors trimmed positions amid the turmoil in world stock and credit markets.
London Brent crude (delayed) settled up 18 cents at $70.39, off lows of $68.95.
The U.S. Federal Reserve injected $38 billion into the U.S. banking system in three operations on Friday to ease tight short-term credit conditions caused by the crisis in the subprime mortgage sector, which lends money to people with poor credit histories.
Banks have been reluctant to make short-term loans after revelations of large losses on investments in subprime mortgages at several large U.S. and European financial institutions. Oil traders have been concerned that hedge funds and other traders could sell off their energy holdings to raise cash even as oil market fundamentals appear strong.
"There is a sigh of relief that much liquidity has been injected into the stock markets and that is helping calm down the energy markets," said Mark Waggoner, president of Excel Futures in Huntington Beach, California.
"Now, people who were selling earlier are buying back, covering their short positions," he added.
Central banks worldwide have injected at least $326 billion over the last 48 hours into capital markets rocked by problems at banks and funds exposed to bad loans in the U.S. mortgage sector.
Oil has fallen from its record high of $78.77 set on Aug. 1 although selling has been orderly in contrast to the volatile swings in other markets and futures positions have not been cut dramatically.
"I suspect the speculative interests are moving to the sidelines, raising cash and attempting to avoid risk," said Mike Fitzpatrick, vice president at MF Global.
Expectations that oil demand would remain robust have helped to put a floor under oil prices. The International Energy Agency, which groups major industrialized nations, said Friday world oil demand will grow at a faster pace in 2008 than this year and repeated its call for more OPEC oil.
China's crude July imports surged 39 percent versus the year-ago period, according to customs data, the fastest pace since January 2006 and despite a sharp rally in global oil prices last month.
OPEC has rejected calls from the IEA and oil importing nations to increase production, noting that oil inventories in consuming nations remain high.
"To me, the market still looks tight," said Tom Nelson, analyst at Guinness Atkinson Asset Management, adding that the build in OECD oil stocks in the second quarter was smaller than normal at 67 million barrels.