Oil prices rise to $98 a barrel as dollar falls
NEW YORK - Oil prices resumed their march toward $100 Tuesday, rising to records over $98 a barrel as futures drew strength from a declining dollar, news of refinery problems and speculation that the Federal Reserve will again cut interest rates.
And sustained higher oil prices remain a big concern for many economists, who fear a U.S. recession may result.
Oil futures, which offer a hedge against a weak dollar, picked up momentum Tuesday as the dollar fell to a new low against the euro, and added to their gains after the Fed forecast slowing growth and tame inflation next year.
Light, sweet crude for January delivery surged $3.39 to settle at a record $98.03 a barrel on the New York Mercantile Exchange.
Crude prices are 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.
Dollar danger
Many analysts cite speculative investing fueled by the weak dollar as a key reason for oil’s fall rally.
On Tuesday, the release of minutes Tuesday from the Fed’s October meeting and its economic forecasts for the next three years led many investors to think a December rate cut was imminent. That drove the dollar down almost across the board and to new record lows against the euro.
The euro reached as high as $1.4819, according to Dow Jones’ Interbank foreign-exchange rates, before settling back to $1.4815 late in New York, still significantly up from the $1.4667 it bought Monday.
“Expectations of interest-rate cuts by the Federal Reserve are sending the dollar lower and this is once again drawing buyers … into the crude-oil market,” said Addison Armstrong, an analyst at TFS Energy Futures in Stamford, Conn., in a research note.
Rising fuel prices that businesses and consumers took in stride earlier this year may now be near the point of pushing the weakened U.S. economy into recession.
“We are in a danger zone,” says Nariman Behravesh, chief economist at Global Insight and a former Federal Reserve economist. “It would take two shocks to bring the economy to its knees. We got one shock in the form of the credit crunch. Oil could be that second shock.”
Credit contamination
Crude-oil prices are poised to cross the $100-a-barrel mark while the U.S. economy is still reeling from a surge in corporate borrowing costs. Europe and Japan are vulnerable, too, after the U.S. subprime-mortgage collapse contaminated their credit markets.
Energy efficiency
The world economy may still dodge recession as emerging markets continue to expand. A Nov. 5 report by Deutsche Bank said gains in energy efficiency mean the effect of more expensive oil will “remain muted.”
Even so, gloom is spreading at a speed that suggests “we’re walking a really fine line,” says John Silvia, chief economist at Wachovia Bank. “Even a month ago, you probably wouldn’t have thought we’d be seeing a sustained credit problem and oil holding up above $85 a barrel.”
The dilemma for central banks is how to balance oil’s drag on their economies against the risk of higher inflation. Fed Chairman Ben Bernanke told Congress Nov. 8 that oil prices threaten both “renewed upward pressure” on inflation and “further restraint on growth.”
Such concerns prompted the European Central Bank to keep interest rates on hold.
Recession worries
Clayton Jones, chief executive officer at Rockwell Collins, says central bankers should err on the side of supporting growth. Jones, whose company makes aircraft-cockpit instruments, said in an interview he’s “much more worried about recessionary impacts rather than inflationary impacts.”
The speed of the latest jump in oil prices tests the resilience of economies that weathered previous increases, says David Hale, president of Hale Advisors.
“We’ve had stages in which the price has gone up over a period of two or three years,” he told a Nov. 7 teleconference. “The recent price spike from $85 to $96 has happened in just a few weeks, so this will pose more of a risk.”
The longer prices remain high, the greater the threat, says Neal Soss, chief economist at Credit Suisse in New York.
While Soss doesn’t expect a recession, he compares the danger to “driving on an icy road: You may get away with it for a while, but the risk of having an accident has gone up.”