Oil futures rallied to a record again Wednesday, pushing briefly past $101 a barrel after the Federal Reserve lowered its forecast for economic growth this year, convincing energy investors that the central bank will slash interest rates further. At the pump, meanwhile, gas prices rose another 2 cents overnight.
The Fed said damage from the housing slump and problems in the credit markets will slow economic growth to between 1.3 percent and 2 percent this year, down from a previous forecast for GDP growth of between 1.8 percent and 2.5 percent.
Oil investors can interpret such news in one of two ways: Selling on concerns that the economy, and thus demand for oil, is cooling; or buying on the prospect that interest rates will fall, weakening the dollar and feeding new buying of oil futures. On Wednesday, they definitively chose the latter view.
"The Fed was ... the catalyst to get us going here," said Phil Flynn, an analyst at Alaron Trading in Chicago.
The contract for March delivery of light sweet crude , which was expiring later Wednesday, rose 73 cents to settle at a record $100.74 on the New York Mercantile Exchange after earlier rising as high as $101.32, a new trading record. On Tuesday, the contract jumped $4.51 a barrel.
Falling rates tend to weaken the dollar, and crude futures offer a hedge against a falling dollar. Also, oil futures bought and sold in dollars are more attractive to foreign investors when the greenback is falling. In the moments after the Fed released its forecast, oil prices spiked sharply higher.
"This is unbelievable," Flynn said.
Earlier, crude prices fluctuated in part due to low trading volumes. Trading in the expiring March contract was about 10 percent of the level of trading in April crude oil, which will become the front-month contract on Thursday. When volumes are low, price moves can be exaggerated. April crude settled unchanged at $99.70 a barrel after rising as high as $100.86 earlier.
Oil prices are still within the range of inflation-adjusted highs set in early 1980. Depending on how the adjustment is calculated, $38 a barrel then would be worth $96 to $103 or more today.
Two new economic reports Wednesday suggested the economy is cooling. The Labor Department said its Consumer Price Index, a measure of inflation, rose by 0.4 percent last month, more than economists expected. The Commerce Department, meanwhile, said construction of new homes and apartments rose by 0.8 percent in January, but that applications for building permits, an indicator of future activity, fell by 3 percent.
The reports come a week after the Energy Department, the Organization of Petroleum Exporting Countries and the International Energy Agency all lowered their oil demand growth forecasts for this year.
But the prospect that the Fed will reduce rates proved too strong, feeding a new buying frenzy, analysts said.
"This is all about momentum and driving (prices) higher right now," Flynn said.
Despite the return of $100 oil, and now $101 oil, there are concerns that high oil prices -- and the higher gasoline and heating oil prices they spawn -- are sowing the seeds of their own destruction by contributing to the economic slowdown.
"The price gains raise questions about their sustainability in the face of eroding fundamental strength," said Antoine Halff, an analyst a Newedge USA in a research note.
At the pump, gas prices rose 2.1 cents to a national average of $3.053 a gallon Wednesday, according to AAA and the Oil Price Information Service. In it weekly survey, the Energy Department said regular gasoline rose 8.2 cents last week to an average of $3.042 a gallon. Retail gas prices, which typically lag the futures market, are following oil higher. Analysts and the Energy Department expect prices to peak this spring well above last May's record $3.227 a gallon.
Other energy futures fell Wednesday. March gasoline slipped 1.79 cents to settle at $2.5852 a gallon on the Nymex, while March heating oil fell 0.68 cent to settle at $2.7546 a gallon.