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Rate Cut Could Help Push Oil Prices Over $100

The Federal Reserve's latest cut in interest rates, combined with an unexpected drop in crude supplies last week, could finally send oil prices over $100 a barrel.

The Fed's decision to cut two key interest rates a quarter point could further weaken the dollar and act as an enticement to buy oil. Oil prices surged to over $94 a barrel after the Fed's cut was announced Tuesday afternoon.

Oil Barrels
Oil Barrels

Because oil is priced in dollars, a weaker U.S. currency makes oil cheaper for those in other countries to convert their currency and buy crude. That increased buying sends oil prices even higher.

In the meantime, a report on oil supplies showed crude stocks down 3.9 million barrels, news that stunned a market looking for an increase of 600,000 barrels.

Some analysts believe the $100 threshold is now well within sight of speculators who have been aggressively betting up oil prices.

"I think that's entirely possible," said Randy Ollenberger, managing director at BMO Capital Markets. The Fed rate cut "is going to lead to further weakness in the US dollar. There's obviously going to be a great correlation between oil prices moving higher and the dollar moving lower."

Analysts generally have oil fundamentals calling for a price between $75 to $80 a barrel.

But a rash of speculation driven primarily by geopolitical tensions has kept prices inflated. Javad Yarjani, an Iranian oil official with the Organization of Petroleum Exporting Countries, warned of an oil "bubble" that would pop.

Today's supply data, though, indicated that the oil rally could have more legs.

"Everybody wants to pick a number," said Mike Theesfeld, a trader with HPR Commodities. "I wouldn't be surprised to see $95."

Not everyone is convinced.

Roger Reed, senior energy analyst at Natixis Bleichroder, which in September had put out a $70 price target for crude, said the expected rate cut "is pretty well baked in" to prices. However, he still believes $100 is on the horizon.

"You probably don't get a hundred here. Probably sometime in the summer is when you see it," Reed said.

Ollenberger is more bullish on oil prices, though he said there likely would be a significant correction afterwards to bring the price more in line with fundamentals.