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Oil Hits Record Highs as Fed Cuts Interest Rates

Oil Refinery
Oil Refinery

Oil futures rose to new records Tuesday after the Federal Reserve cut interest rates by a larger-than-expected half percentage point, raising market hopes that economic growth will accelerate and lift demand even as crude oil and gasoline inventories are tight.

U.S. light, sweet crude for October delivery surged to a new trading high of $81.90 on the New York Mercantile Exchange, in the moments immediately after the Fed's decision.

It held a gain of 94 cents to settle at $81.51 per barrel, also a new record.

Investors had already priced a quarter-point cut in the benchmark federal funds rate into the market, said Brad Samples, a commodities analyst at Summit Energy Services in Louisville, Ky. The half-point cut spurred even more buying.

Moreover, many analysts see a weaker dollar as a natural side effect of lower rates, and that could promote buying of oil contracts by foreign investors.

"Lower interest rates have the unintended consequence of raising oil prices if the dollar declines relative to other currencies," said Larry Chorn, chief economist at Platts, the energy research arm of McGraw-Hill, in a statement.

"Seen through a euro or yen prism, nominal [New York Mercantile Exchange crude] prices have yet to reach their 2006 highs," said Antoine Halff, head of energy research at Fimat USA, in a research note.

Prices also rose as investors looked ahead to Wednesday's inventory report by the Energy Department's Energy Information Administration, expected to show inventories and refinery activity declined last week.

A bomb attack on a pipeline near the northern Iraqi city of Beiji on Tuesday, which caused crude oil to spill into the Tigris River, contributed to Tuesday's advance.

In other Nymex trading, October gasoline rose 1.61 cents to settle at $2.0603 per gallon on the Nymex, while heating oil futures rose 1.36 cents to settle at $2.2423 a gallon.

October natural gas fell 8.5 cents to settle at $6.568 per 1,000 cubic feet.

Weather Threats

Natural gas prices have been volatile in recent days as tropical weather threats to critical gas and oil infrastructure in the Gulf of Mexico have grown or subsided. On Tuesday, the National Hurricane Center was watching two storm systems, one just east of Florida and the other in the central Atlantic.

Futures pared earlier losses after updated forecasts said the Florida system could develop in strength over the next couple of days.

At the pump, meanwhile, gasoline prices slipped 0.1 cent overnight to a national average of $2.787 a gallon, according to AAA and the Oil Price Information Service. Retail prices, which typically lag the futures market, peaked at $3.227 per gallon in late May.

Early in the year, gas prices led the energy complex higher as an unusual number of refinery outages kept supplies low. With the end of summer driving season, energy investors have been far less focused on gasoline inventories and refinery activity than they once were.

In its Wednesday report, analysts surveyed by Dow Jones Newswires expect the EIA to show that crude inventories fell by 1.5 million barrels, on average, in the week ended Sept. 14, while gasoline supplies fell by 1.3 million barrels.

Refinery utilization likely fell by 0.5 percentage point to 90 percent of capacity, the analysts forecast, and distillate inventories, which include heating oil and diesel fuel, likely rose by 1.1 million barrels.

Crude oil's recent rise into record territory has been driven in part by a belief that supplies are not keeping pace with robust global demand. Last week, for instance, prices rose despite OPEC's decision to boost production by 500,000 barrels a day this fall. Many analysts and investors saw that increase as too little.

Earlier Tuesday, oil prices drew support from new comments by Organization of Petroleum Exporting Countries officials that suggested the oil cartel won't increase production to push oil prices below $80 a barrel.

"OPEC has done what it can," said Abdullah bin Hamad Al Attiyah, Qatar's oil minister. "I see no need for additional oil supply that the market won't absorb."

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