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Oil Closes at Record $80.57 on Supply Worries

Reuters
Monday, 17 Sep 2007 | 3:20 PM ET

Oil closed at a record $80.57 on Monday on worries that global energy supplies could shrink to critical levels this winter heating season due to strong demand growth.

Oil Refinery
Oil Refinery

Expectations the U.S. Federal Reserve will agree to cut interest rates when it meets on Tuesday also supported oil and other commodities markets, raising the likelihood the economy will weather a U.S. credit crisis.

U.S. crude rose $1.47 a barrel, or 1.9 percent, to $80.57 after hitting a record intraday high of $80.70. London Brent rose 60 cents to $76.82 a barrel.

Though oil prices have quadrupled since 2002, when adjusted for inflation the price is still below the $90-a-barrel peaks of the Iranian Revolution in 1979.

The Organization of the Petroleum Exporting Countries agreed on a small supply increase last week, but analysts said the decision to raise output by 500,000 barrels per day (bpd) from November 1 was not enough to reverse a rally that has lifted prices around 30 percent this year.

"We believe that this will be too little, too late, barring an outright collapse in demand, and now expect inventories to draw to critical levels this winter," said investment bank Goldman Sachs in a research note.

Goldman said it expected oil prices to hit $85 by the end of this year.

U.S. crude supplies are running at their lowest level in eight months while gasoline supplies in the top energy consumer were down at their lowest level since Hurricane Katrina knocked out several Gulf Coast refineries in 2005.

Analysts expect U.S. oil and gasoline supplies will fall further as recent storms in the Gulf of Mexico crimp imports and refinery operations.

Other commodities also shot higher on Monday, with gold reaching a 16-month high, supported by expectations of a U.S. interest rate cut that could increase investment flows.

The U.S. central bank will meet on Tuesday and experts expect it to agree to cut its benchmark federal funds rate by at least a quarter percentage point to help markets hobbled by a credit crunch.

"If the Fed (Federal Reserve) cuts rates this week the macroeconomic view could be seen as improving for energies, especially if the dollar remains under pressure," said Mike Fitzpatrick of MF Global.

Dollar-denominated commodities tend to strengthen when the dollar weakens against other currencies.

Oil was also receiving support Monday from fresh concerns over Iran's nuclear program.

France's foreign minister, Bernard Kouchner, increased pressure on Tehran on Sunday, saying France had to prepare for the prospect of war with Iran. Iran has called the comments provocative.

Oil's gains Monday were limited somewhat as Ingrid, the ninth named storm of the 2007 Atlantic hurricane season, was downgraded to a tropical depression.

Three refineries in Texas shut by the previous Gulf of Mexico storm, Humberto, were working to restore operations.

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