Trade with Commodities: $110 a barrel, well almost

Tuesday, March 11, 2008

$110 a barrel, well almost

Fed Move To Inject Liquidity Into Strained Markets Sees Oil React To The Dollar Reversal

OIL surged to a record near $110 a barrel on Tuesday before a liquidity injection by the US Federal Reserve and other central banks erased gains. “Oil is definitely reacting to the reversal of the dollar, on co-ordinated central bank liquidity action,” said Tom Bentz, analyst at BNP Paribas Commodity Futures.
    US crude for April delivery rose 2 cents to $107.92 a barrel at the time of going to press after hitting $109.72 a barrel earlier, marking the fifth straight day of new highs. London Brent crude rose 23 cents at $104.39, off its record high of $105.82.
    The US Federal Reserve joined other central banks to add up to $200 billion to loosen up financial markets still constrained by effects of the credit crisis. The Fed action boosted stocks and helped the dollar rally. The dollar rebounded against the euro after hitting an all-time low against the European currency earlier in the session.
    Dollar weakness has reflected expectations of more interest rate cuts by the Fed to boost the flagging economy in the US, the world’s top energy consumer.
    Oil prices had dipped slightly after the International Energy Agency said world oil demand would be less than expected this year because of slower economic growth in industrialised countries and record prices. But the agency also said only a severe recession would push oil back below $60 a barrel.
    “We are in an era of higher oil prices and so if we look at $100 oil we have to do so with an understanding that prices are unlikely to return to levels seen in the early part of the decade,” said the IEA, which advises 27 industrialised countries.
    Oil has set a string of record highs as a bullish long-term supply outlook for oil and other commodities has continued to suck in investment flows looking for alternatives to equities and bonds that are overshadowed by the credit market crises and fears of a US slowdown.
“Looking at the big picture, we believe that the recent price surges in the commodity sector have been for the most part triggered by large capital inflows from institutional investors, hedge funds above all,” said fund manager Tiberius Asset Management in a research note. Goldman Sachs warned oil was at risk from substantial fund liquidation due to cyclical fundamental weaknesses in the next few months, but the investment bank remains constructive on energy for the long-term.
The latest update on fuel supplies in the US, due Wednesday, is forecast to show a 1.9 million barrel rise in crude oil inventories last week, according to a preliminary Reuters poll.