Price of crude oil hits another record

Price of crude oil hits another record

A weak dollar is attracting investors to oil, which props up the price.

NEW YORK (AP) — Crude prices extended their march into record high territory Thursday, shooting up more than $2 a barrel as a falling dollar and the prospect of lower interest rates attracted more investors to the oil market. Retail gas prices, meanwhile, rose closer to records above $3 a gallon.

Light, sweet crude for April delivery rose $2.95 to settle at a record $102.59 a barrel on the New York Mercantile Exchange. Prices continued rising after the Nymex closed, setting a new trading record of $102.97.

A pair of dismal economic reports drew more money into the oil market, as did Federal Reserve Chairman Ben Bernanke’s comments that the economy is not immediately threatened with stagflation, a combination of economic weakness and rising inflation.

The Commerce Department said gross domestic product grew at only a 0.6 percent rate in the fourth quarter, below estimates and at only a fraction of the previous quarter’s growth rate, while the Labor Department said applications for unemployment benefits rose by 19,000 last week, more than expected.

Rather than viewing such news as bad for oil demand, investors chose to see it as confirmation of their beliefs that the Fed will continue cutting interest rates to try to shore up the economy. Interest rate cuts tend to weaken the dollar, and crude futures offer a hedge against a falling dollar.

Also, oil futures bought and sold in dollars are more attractive to foreign investors when the greenback is falling.

“I really think that this is oil being viewed as ... a financial instrument,” said Phil Flynn, an analyst at Alaron Trading Corp. in Chicago.

Crude prices are within the range of inflation-adjusted highs set in early 1980. A $38 barrel of oil then would be worth $97 to $104 or more today, depending on how the adjustment is calculated. A direct comparison with daily Nymex prices is difficult because historical data, gathered before the crude futures contract was created in 1983, are based on average monthly prices posted by oil producers.

Oil’s rally is pulling gas prices higher. At the pump, retail gasoline prices rose 0.9 cent overnight to a national average of $3.161 a gallon, according to AAA and the Oil Price Information Service. Prices are within 7 cents of May’s record of $3.227 a gallon.

The Energy Department expects prices to peak near $3.40 a gallon this spring; many analysts think prices will rise much higher than that.

On Wednesday, oil prices fell $1.24 a barrel after the Energy Department reported crude inventories rose more than expected last week.

But that reflected a rare reaction by oil investors to supply and demand fundamentals.

“[Fundamentals] have no relationship to price right now,” Flynn said. If prices were responding to supply and demand, fundamentals, they would be falling, he said.

Several recent forecasters have lowered oil demand growth predictions for this year due to the slowing economy, and domestic oil inventories have been growing.

Many analysts believe it’s just a matter of time until the fundamentals reassert themselves on the market, pushing prices down.