Fed cuts increasing demand and lowering the dollar support crude prices

Oil futures jump back above $90 a barrel

by John Wilen

Oil futures jumped back above $90 a barrel Friday, adding to the previous session’s sharp gains on a view that the recession worries that pulled prices lower in recent weeks may have been overblown.

So markets are now linking rising oil prices to a stronger economy? This is a change in rhetoric from the previous talk that high oil prices were slowing demand, to the current talk that high demand is driving up oil prices.

This would signal to the Fed that markets are saying the economy is now strong enough to cause further inflation.

Energy investors were heartened by recent moves by the Federal Reserve and Congress to shore up the economy, which could prevent oil demand from slowing as much as many had feared.

The Fed doesn’t want this to happen – markets seeing their moves as supportive of higher inflation.

“This week’s emergency interest rate cut by the Fed and the economic stimulus plan proffered by Congress appear to have, for now, stemmed fears of a looming recession in the U.S.,” said Addison Armstrong, director of exchange traded markets at TFS Energy Futures LLC, of Stamford, Conn., in a research note.

Word that Chinese oil demand grew by 6.4 percent in December, the highest rate in months, contributed to oil’s advance.

Concerns that demand from the booming Chinese and Indian economies is outstripping global oil supplies helped push oil to records above $100 earlier this month.

Rising oil prices are also signaling that India and China continue to grow quickly enough to drive up prices.

Light, sweet crude for March delivery rose $1.30 to settle at $90.71 on the New York Mercantile Exchange after rising as high as $91.38. Oil futures last closed above $90 last Friday.

While investors believe the government’s $150 billion stimulus plan and the Fed’s rate cuts will stave off a serious economic slowdown, rate cuts also tend to weaken the dollar, giving investors another reason to buy oil futures. 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 greenback is falling.

And the Fed’s cuts have weakened the dollar and also contributed to the higher oil prices.

In other words, the article is stating that the rate cuts caused both strong demand and a weak dollar, both driving up inflation.

The financial media is beginning to look past recession fears and to inflation.

Look for article about how the Fed is falling behind the inflation curve.

“When (investors in foreign) countries go to buy oil, they’re buying it on sale,” said James Cordier, president of Liberty Trading Corp., in Tampa, Fla.

Many analysts believe the weakening dollar helped draw speculative investors into oil markets this fall and winter, driving oil prices
above the $100 mark.

Other energy futures also rose Friday. February heating oil futures jumped 4.28 cents to settle at $2.5191 a gallon on the Nymex while February gasoline futures added 3.54 cents to settle at $2.3182 a gallon. Heating oil and gasoline prices were supported by news that Valero Energy Corp.’s 255,000 barrel a day refinery in Aruba was shut down due to a fire.

February natural gas futures rose 18.1 cents to settle at $7.983 per 1,000 cubic feet.

In London, March Brent crude rose $1.83 to settle at $90.90 a barrel Friday on the ICE Futures exchange.