Oil prices surpassed $103 a barrel for the first time on Friday as persistent weakness in the US dollar and the prospect of lower interest rates attracted fresh money to the oil market.
Prices were supported by comments on Thursday from Federal Reserve Chairman Ben Bernanke, who said the American economy is not immediately threatened with stagflation, a combination of economic weakness and rising inflation.
Investors chose to see the comments as confirmation of their beliefs that the Fed will continue cutting interest rates to try to shore up the economy.
Lower US interest rates tend to weaken the dollar, and crude futures offer a hedge against a falling dollar.
``Due to the weakening dollar and the rising fear of inflation, investors have put money into commodities, oil included,'' said Victor Shum, an energy analyst with Purvin & Gertz in Singapore.
``Commodities, as tangible assets, do not face as much inflationary threat as opposed to holding a currency,'' Shum said. ``Even though the value of money is changing, the asset continues to have an intrinsic value.''
Light, sweet crude for April delivery jumped to a new trading record of US$103.05 a barrel in Asian electronic trading on the New York Mercantile Exchange before slipping back to US$102.92 a barrel, up 33 cents.
On Thursday, the contract jumped US$2.95 to settle at a record US$102.59 a barrel.
Shum warned that a price bubble was emerging in the crude futures market as investors ignored market fundamentals that have shown continuous increases in U.S. crude supply while several recent forecasters have lowered oil demand growth predictions for this year due to the slowing economy.
``We've seen seven straight weeks of builds in crude oil inventories. The oil market fundamentals are softening and yet we see record highs being set, day in and day out,'' Shum said.
Shum warned of the possibility of a sharp correction at some point, though unlikely in the near term.
``Right now, there's a lot of trading based on emotion emotions are high and that could keep crude oil at elevated levels, but the market faces the risk of a price collapse.''
Crude prices are within the range of inflation-adjusted highs set in early 1980. A US$38 barrel of oil then would be worth US$97 to US$104 or more today, depending on the 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.
In other Nymex trading, heating oil dropped 0.82 cent to US$2.8538 a gallon (3.8 liters) while natural gas futures added 0.2 cent to US$9.445 per 1,000 cubic feet.
In London, Brent crude futures rose 1 cent to US$100.91 a barrel on the ICE Futures exchange.
Friday, February 29, 2008
Oil tops $103 a barrel
Posted by Morgan at 6:38 PM