Price moves up as Fed cuts rate to strengthen US economy
Crude prices rose by more than $4 today, Tuesday, 18 March, 2008. Prices rose after the Federal Reserve decided to cut overnight lending rates by 75 bps to bring it down to 2.25% to strengthen the economy. Dollar continued to remain under pressure today because of this. Yesterday, crude suffered the biggest daily loss for crude in 17 years due to credit market concerns.
Crude-oil futures for light sweet crude for April delivery today closed at $109.42/barrel (higher by $3.74/barrel or 3.5%) on the New York Mercantile Exchange. They earlier dropped to $108 before Fed’s move. Crude prices are 92% higher on a yearly basis.
Crude prices, denominated in dollars, tend to rise when the greenback falls, as a weaker U.S. currency makes crude less expensive to buyers holding other currencies. It also lowers oil producers' dollar revenue and forces them to raise prices.
The Fed reduced its benchmark rate by 0.75 percentage point to 2.25%. The lending rate has been cut by 2 percentage points this year in the most aggressive easing since the late 1980s. The falling dollar has spurred traders to invest in commodities as it makes them cheaper for those who are holding other currencies. The Fed said the size of the rate cut was enough to promote growth.
Brent crude oil for April settlement today rose $3.81 (3.7%) to $105.56 on the London-based ICE Futures Europe exchange. The London benchmark rose 54% in FY 2007, the most since 1999 when prices more than doubled.
Natural gas remains steady
Natural gas advanced, led by higher crude prices, after a cut in U.S. interest rates prompted investors to buy commodities as a hedge against inflation and a weakening dollar. Gas for April delivery rose 31.4 cents (3.5%) to settle at $9.414 per million British thermal units.
Against this backdrop, April reformulated gasoline gained 15.58 cents to $2.66 a gallon, and April heating oil rose 6.95 cents to $3.1379 a gallon.
Crude had ended FY 2007 substantially higher by $35 or 57%. It was crude’s biggest yearly gain in five years.
The International Energy Agency, cut its forecast for 2008 global oil demand for a second month as record prices curbed consumption in some parts of the world. The agency reduced its forecast by 80,000 barrels a day to 87.54 million barrels a day, leaving annual demand growth at 2%.
OPEC left production targets unchanged on its 5 March meeting at Vienna, giving 12 of its 13 members a combined quota of 29.67 million barrels a day.
At the MCX, crude oil for March delivery closed at Rs 4,292/barrel, higher by Rs 119 (2.8%) against previous day’s close. Natural gas for March delivery closed at Rs 375.1/mmtbu, lower by Rs 0.9/mmtbu (0.24%).
The Energy Information Administration will report last week's U.S. crude inventories tomorrow at 10.30 E.T am at Washington.