Tuesday, September 18, 2007

Oil price soars to record high after Fed rate cut

NEW YORK (AFP) — Oil soared to fresh record highs in New York Tuesday as traders viewed the half-point cut in interest rates by the Federal Reserve as an economic boost that would keep energy demand high.

New York's main futures contract, light sweet crude for delivery in October, climbed 94 cents to a record close at 81.51 dollars a barrel. In after-hours trade, the price hit an all-time high of 82.16 dollars.

In London, the price of Brent North Sea crude for November delivery advanced 61 cents to settle at 77.59 dollars per barrel.

Oil prices, which have streaked to record highs in recent days on concerns about tight supplies and rising demand, bolted again on news that Federal Reserve policymakers had cut the key federal funds rate by a hefty half point to 4.75 percent.

The Federal Open Market Committee, in a unanimous decision after a one-day meeting, also cut its discount rate for direct central bank loans by 50 basis points to 5.25 percent.

"Today's action is intended to help forestall some of the adverse effects on the broader economy that might otherwise arise from the disruptions in financial markets and to promote moderate growth over time," the FOMC said in a statement.

The Fed had been widely expected to cut interest rates to ease a credit crunch related to problems in the risky subprime mortgage sector. But analysts had been divided over whether it would be a quarter-point or half-point reduction.

"The initial response (of the market) was obviously positive" to a rate cut that "was larger than expected," said Eric Wittenauer, an analyst at AG Edwards.

The bold half-point to stimulate the economy could boost demand for oil in the world's biggest energy consumer.

Prices already have found strong support as supplies remain tight and global demand strong as the northern hemisphere heads into winter.

"The bottom line is the market is getting more concerned about the supply outlook for this winter," said Phil Flynn of Alaron Trading.

"Those fears were expressed not only by the markets movement but also by a report from the Centre for Global Energy Studies that warns that OPECs decision to pump more crude oil in November wont bring oil prices down during the Northern Hemispheres winter."

Barclays Capital analyst Kevin Norrish said "the fundamental backdrop is that inventories are falling fast."

"Given the seasonal pick-up in demand plus the lack of very strong supply growth outside of OPEC, it looks like inventories will continue to fall."

Meanwhile, the OPEC oil cartel's announcement last week to pump an extra 500,000 barrels per day from November has failed to stop surging prices, with some analysts predicting prices could keep soaring to 85 dollars and beyond.

Goldman Sachs raised its year-end 2007 price forecast to 85 dollars per barrel, "with a high risk of a spike above 90 dollars per barrel," and said crude could hit 95 dollars by the end of next year.

Last week, New York crude had smashed through 80 dollars per barrel for the first time as prices were also pressured by potential hurricane damage of American energy facilities in the US Gulf of Mexico.

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