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November 2007

Vol. 12, No. 47 Week of November 25, 2007

Oil futures jump on dollar Fed forecast

Crude oil prices approach $100 a barrel after U.S. dollar hits new low, talk Federal Reserve will cut interest rates again

John Wilen

Associated Press Business Writer

Oil prices resumed their march toward $100 Nov. 20, rising to records over $98 a barrel as futures drew strength from a declining dollar, news of refinery problems and speculation that the Federal Reserve will again cut interest rates. Heating oil futures also rose to new records.

Gasoline prices, meanwhile, extended their decline at the pump.

Oil futures, which offer a hedge against a weak dollar, picked up momentum as the dollar fell to a new low against the euro, and added to their gains after the Fed forecast slowing growth and tame inflation next year.

Light, sweet crude for January delivery surged $3.39 to settle at a record $98.03 a barrel on the New York Mercantile Exchange. Prices continued rising in electronic trading after the Nymex closed, matching the trading record of $98.62 a barrel set the week ending Nov. 16.

Crude prices are within the range of inflation-adjusted highs set in early 1980. Depending on how the adjustment is calculated, $38 a barrel then would be worth $96 to $103 or more today.

Gasoline prices down

Gasoline prices fell 0.5 cent overnight, retreating further from their most recent spike above $3. At a national average of $3.09 a gallon, according to AAA and the Oil Price Information Service, gasoline prices have fallen 2.2 cents in a little less than a week. The week ending Nov. 16, many analysts predicted prices would instead rise another 10 to 15 cents a gallon to catch up with surging oil prices.

“More than likely, (prices will) probably hold steady through the end of the year,” said Fred Rozell, retail pricing director at the Oil Price Information Service. “But that doesn’t mean you’re going to see relief in terms of lower prices.”

Because gasoline prices are closely tied to the price of crude, pump prices could start rising again if crude does reach $100 a barrel, or higher.

Speculative investing cited

Many analysts cite speculative investing fueled by the weak dollar as a key reason for oil’s fall rally.

“Expectations of interest rate cuts by the Federal Reserve are sending the dollar lower and this is once again drawing buyers ... into the crude oil market,” said Addison Armstrong, an analyst at TFS Energy Futures LLC in Stamford, Conn., in a research note.

The Fed said it thinks business growth will slow next year, with gross domestic product growing between 1.8 percent and 2.5 percent. That’s less than the Fed’s previous projections. Meanwhile, overall inflation should fall next year to between a 1.8 percent and 2.1 percent increase, the Fed said.

“They just opened the door for the possibility of more rate cuts,” said Phil Flynn, an analyst at Alaron Trading Corp. in Chicago.

However, the rising cost of energy could also persuade the Fed to either leave rates stable or raise them — the latter would likely lend support for the dollar and could pull oil prices back down.

Energy futures received an additional lift from word of problems at two oil facilities Nov. 20. A Valero Energy Corp. refinery in Memphis, Tenn., that processes 180,000 barrels of crude a day has shut down for 10 days of unplanned maintenance and a Royal Dutch Shell PLC plant that converts bitumen from Alberta’s oil sands region into 155,000 bpd of synthetic crude oil was temporarily shut down due to fire.

Oil product futures surged on the news. December heating oil futures climbed 8.59 cents to settle at a record $2.6901 a gallon while gasoline futures for December delivery rose 6.99 cents to settle at $2.4515 a gallon.

“When you get this kind of problem in this kind of environment, prices will rise,” Flynn said.

l

Natural gas futures fal

Natural gas futures fell 31 cents to settle at $7.477 per 1,000 cubic feet on the Nymex. Natural gas inventories are at record levels, and several recent forecasts have predicted a warmer than normal winter.

In London, January Brent crude futures rose $3.21 to settle at $95.49 a barrel on the ICE Futures exchange.

Traders were also anticipating the Nov. 21 petroleum inventory report from the Energy Department’s Energy Information Administration. Analysts surveyed by Dow Jones Newswires, on average, predict that crude oil inventories rose by 800,000 barrels the week ending Nov. 16, while refinery use grew by 0.4 percentage point to 88.1 percent of capacity.

Gasoline inventories likely grew by 700,000 barrels, the analysts predicted, while inventories of distillates, which include heating oil and diesel fuel, fell by 400,000 barrels.

While oil supplies likely rose the week of Nov. 12, prices were being supported Nov. 20 by concerns there would be a bullish surprise in the EIA report, such as an unexpected decline in inventories. l

—Associated Press Writers Pablo Gorondi in Budapest and Gillian Wong in Singapore contributed to this report.





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