Oil’s Rise Moderates After Fed Rate Cut

By JOHN WILEN

NEW YORK – Oil futures closed above $90 a barrel Tuesday, but retreated from earlier highs after the Federal Reserve disappointed investors by cutting a key interest rate less than many had hoped.

Gas prices, meanwhile, fell below $3 for the first time since Nov. 4, extending a trend that’s expected to last through the heavily traveled Christmas and New Year’s holidays.

While traders saw the Fed’s decision to cut the federal funds rate by one-quarter of a percentage point to 4.25 percent as a move that will help the U.S. economy – the world’s top oil consumer – and bolster demand for crude, many were hoping for a larger half-point cut.

Interest rate cuts tend to weaken the dollar against other currencies. Oil futures offer a hedge against a weak dollar, and oil futures bought and sold in dollars are more attractive to foreign investors when the greenback is falling. Many observers blame oil’s rise last month to near $100 on speculators driven to oil futures by the weaker dollar.

Though the Fed rate cut wasn’t all some investors had hoped for, it was still bullish for oil prices, said Larry Chorn, chief economist at Platts, the energy research arm of McGraw-Hill Cos.

“The Fed is willing to risk further commodity inflation in order to avoid a recession,” Chorn said. “This signal should reassure the energy industry that demand growth will continue on trend.”

Light, sweet crude for January delivery rose $2.16 to settle at $90.02 a barrel after rising as high as $90.70 before the Fed announcement. Prices retreated below $90 in electronic trading after the Nymex closed.

News that several crude oil pipelines in the Midwest were shut down due to ice storms also boosted crude prices.

At the pump, gas prices fell 0.8 cent overnight to a national average of $2.995 a gallon, according to AAA and the Oil Price Information Service. Gas prices have fallen nearly 12 cents since peaking at $3.112 a gallon in mid-November as oil approached $100 a barrel.

“Gas prices at the pump are likely to continue to decline over the next several weeks,” said Fred Rozell, retail pricing director at the Oil Price Information Service.

However, Rozell doubts prices will decline as much this winter as they did last year. A year ago, gas cost $2.292 a gallon. That means gas prices will be starting from a much higher level when they begin their seasonal spring increase in advance of summer driving season.

“Unfortunately, we will not get close to the numbers we saw last year and the spring will see another run up as it has the past 5 years,” Rozell said.

The Energy Information Administration on Tuesday predicted gas prices will average more than $3 a gallon next year, and will rise above $3.40 a gallon in the spring.

Some analysts doubt gas prices will fall much more as long as oil remains near $90 a barrel.

“I think they may be near the bottom at these prices because I think they never captured the $98, $99 crude prices,” said Michael Lynch, president of Strategic Energy & Economic Research Inc. in Amherst, Mass.

Crude prices have fallen in recent weeks but remain high by historical standards. A year ago, Nymex crude closed at $61.22 a barrel.

Energy futures prices also rose on pipeline outages due to ice storms in the Midwest. Some of the affected pipelines serve the closely watched Nymex delivery terminal at Cushing, Okla. An EIA report predicting “world oil demand will grow much faster than oil supply” offered traders mixed news. The report lowered global oil demand predictions for next year, but forecast oil prices will average nearly $85 a barrel in 2008 and that heating oil prices will rise 30 percent this winter compared to last.

Other energy futures also rose Tuesday. Heating oil futures rose 4.56 cents to settle at $2.523 a gallon on the Nymex while gasoline futures rose 4.13 cents to settle at $2.2914 a gallon.

Energy traders were also anticipating Wednesday’s inventory report from the EIA, which is expected to show an increase in crude supplies.

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

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On the Net:

http://www.eia.doe.gov/emeu/steo/pub/contents.html