U.S. News

Oil Jumps on Fed Discount Rate Cut, Hurricane


Oil prices jumped Friday after the U.S. Federal Reserve cut a key interest rate to calm financial markets and on concerns that Hurricane Dean could hit Gulf of Mexico installations.

U.S. light, sweet crude last traded up 80 cents at $71.80 per barrel, after trading as high as $72.54.

London Brent crude was up 53 cents at $70.30.

Forecasts showing Hurricane Dean could spin toward Gulf of Mexico oil rigs and refineries next week supported oil markets that were nervous about potential damage to the region, which pumps a third of U.S. oil output.

Oil and natural gas companies have already begun evacuation of nonessential staff ahead of Dean, which is expected to hit Mexico's Yucatan Tuesday before entering the Gulf of Mexico.

Only a small volume of output has been shut in so far.

Prices were also boosted by the U.S. Federal Reserve announcement of a cut to the discount rate governing Fed loans to banks of a half percentage-point, or 50 basis points, to 5.75 percent.

In a rare statement between scheduled meetings, the U.S. central bank's policy-setting committee said risks to economic growth "have increased appreciably" due to the global credit crisis and financial market turmoil.

"The cut may ease the liquidity crisis in the United States," Christopher Bellew of Bache Financial said. "Of course, you could interpret it as an indication of how serious they think the problem is."

U.S. crude has fallen more than 8 percent from its Aug. 1 record high of $78.77. Markets have been hit by fears of financial instability after troubles with risky U.S. mortgages and a credit squeeze that had already prompted central banks, including the Fed, to pour money into the financial system.

Oil's rise was part of a broader rally that also lifted stock markets after it took a pounding Thursday, as investors sold to offset losses elsewhere or out of fear that a squeeze on credit would slow economic growth.

"The Fed move is supportive for oil. It is basically suggesting that the Fed is going to take action to stem any decline or slowdown in the economy," said Eric Wittenauer, energy analyst at A.G. Edwards in St. Louis.

Wall Street and European stocks rose sharply Friday after the Federal Reserve move. Gold jumped 2 percent while industrial metals also gained.

Hurricane Watch

Dean strengthened into a Category 3 hurricane Friday, with winds climbing to 125 miles per hour. Hurricane concerns in the the energy markets have increased since 2004 and 2005, when hurricanes Ivan, Katrina and Rita toppled oil rigs and flooded refineries on the U.S. Gulf Coast.

Oil and gas companies operating in the Gulf of Mexico stepped up evacuations of workers Friday, and Shell shut two wells that produce 2,000 barrels per day of oil and 2 million cubic feet per day of natural gas.