Oil Rises Above $101 to Record on
Increased Demand, Rate Cuts

MARK SHENK / Bloomberg 20feb2008

Crude oil advanced to a record $101.32 barrel in New York on speculation U.S. interest rate cuts will bolster fuel consumption.

Federal Reserve Chairman Ben S. Bernanke has indicated the central bank will reduce U.S. interest rates if financial conditions and the availability of credit deteriorate. Rising world demand for raw materials helped send oil and commodities including soybeans and platinum to records this week.

"There are 100 reasons for prices to rise, because the market is tight," said Adam Sieminski, Deutsche Bank's chief energy economist in New York. "The only thing that will end this rally is a serious economic downturn. Demand is still expected to grow by more than 1 million barrels a day this year."

Crude oil for March delivery rose 73 cents, or 0.7 percent, to $100.74 a barrel at 2:50 p.m., a second consecutive record close above $100 on the New York Mercantile Exchange. Prices are up 74 percent from a year ago. The price of $101.32 reached today was the highest since oil futures began trading in 1983.

The March contract expired today. The more-active April contract closed at $99.70 a barrel, unchanged from yesterday.

"Part of the rally is related to the expiration of the March contract," said Phil Flynn, a senior trader at Alaron Trading Corp. in Chicago. "It's not unusual for a contract to rally or crash as it nears expiration. There are obviously a lot of people who need to cover shorts."

Shorts are bets that prices will decline.

Global Consumption

Global oil demand will rise 1.7 million barrels a day to 87.6 million barrels a day this year, the International Energy Agency said in a monthly report on Feb. 13. The U.S. Energy Department and the Organization of Petroleum Exporting Countries also expect daily global consumption to rise by more than 1 million barrels this year.

"We should be looking at oil in the $120-to-$150 area by the end of the year without any major changes," said Peter Schiff, chief executive officer of Darien, Connecticut-based brokerage Euro Pacific Capital, which has $1 billion in customer accounts.

U.S. crude-oil stockpiles probably rose 2.3 million barrels last week, according to the median of 11 responses in a Bloomberg News survey. Supplies jumped 18.2 million barrels, or 6.4 percent, the previous five weeks. The Energy Department is scheduled to release its weekly report on inventories tomorrow at 10:30 a.m. in Washington.

"Once the report comes out tomorrow traders will probably start buying again, regardless of the numbers," said Peter Beutel, president of energy consultant Cameron Hanover Inc. in New Canaan, Connecticut.

Supplies of distillate fuels, a category that includes heating oil and diesel, fell 1.8 million barrels from 127 million the prior week, according to the survey. Gasoline supplies probably climbed 450,000 barrels from 229.2 million barrels.

Brent crude for April settlement fell 14 cents to close at $98.42 a barrel on London's ICE Futures Europe exchange. Futures reached $99.22 a barrel, the highest since trading began in 1988.

source: 20feb2008