Friday, May 9, 2008

Oil Climbs Above $126 to Record as Dollar Weakens Against Euro

By Mark Shenk

May 9 (Bloomberg) -- Crude oil rose above $126 a barrel in New York to a record as the dollar weakened against the euro, prompting investors to buy commodities as a hedge against the currency's decline.

For a fifth day oil climbed to all-time highs as the euro strengthened on signs the European Central Bank will keep rates at a six-year high to cut inflation. Nigerian output fell to the lowest this decade in April because of a strike and attacks on oil installations.

``Oil is a safe haven because of the weak dollar and how badly the financial sector has been doing,'' said Michael Lynch, president of Strategic Energy & Economic Research in Winchester, Massachusetts. ``There are also geopolitical concerns about places like Nigeria and Venezuela that are propping prices up.''

Crude oil for June delivery rose $2.27, or 1.8 percent, to a record closing price of $125.96 a barrel at 2:55 p.m. on the New York Mercantile Exchange. The contract surged to $126.27 today, the highest since futures began trading in 1983. Prices are up 8.3 percent this week, the biggest weekly gain in more than a year. Futures have more than doubled in the past year.

Brent crude oil for June settlement climbed $2.56, or 2.1 percent, to close at a record $125.40 a barrel on London's ICE Futures Europe exchange. The contract touched $125.90 today, the highest since trading began in 1988.

Oil at $200 is ``possible if we have a continuing devaluation of the dollar with respect to other currencies,'' OPEC President Chakib Khelil said yesterday at a press conference in Washington.

The dollar fell 9.6 percent since Sept. 18, when the Federal Reserve began cutting rates to ease financial-market strains and stave off a recession. The U.S. central bank cut rates seven times while the ECB has left rates unchanged. The dollar fell 0.6 percent to $1.5483 per euro at 3:27 p.m. in New York.

Fed Policy

``Fed policy is accommodating the rise in energy prices,'' said Bill O'Grady, director of fundamental futures research at Wachovia Securities in St. Louis. ``The Fed and federal government are putting more liquidity in people's pockets, which is being spent on expensive oil.''

The U.S. government started sending $117 billion in tax rebate checks last week as part of its fiscal stimulus plan.

Goldman Sachs analyst Arjun N. Murti wrote in a report on May 6 that ``the possibility of $150-$200 per barrel seems increasingly likely over the next six-24 months.'' Murti first wrote of a ``super spike'' in March 2005, predicting crude may trade between $50 and $105 a barrel through 2009.

``There's been a paradox, prices have surged over the last week while we've had bearish headlines,'' said Nauman Barakat, senior vice president of global energy futures at Macquarie Futures USA Inc. in New York. ``Clearly there's been a lot of fund buying on the back of Goldman's super-spike repot. They were right on the nose last time.''

OPEC Meeting

The Organization of Petroleum Exporting Countries, the producer of more than 40 percent of the world's oil, may meet before September to consider increasing output in an attempt to rein in record crude-oil prices, Libya's Shokri Ghanem said.

``We would consider among other options the possibility of increasing output as a way to ensure market stability,'' Ghanem, who is the chairman of Libya's National Oil Corp., said in a telephone interview today from Tripoli.

Nigerian Petroleum Minister of State H. Odein Ajumogobia said today that there are no plans for an additional OPEC meeting because oil supplies are adequate.

OPEC kept its production target unchanged at its past three meetings. The group last increased its target on Nov. 1.

``OPEC loves high oil prices, but they also value an orderly market,'' said Adam Sieminski, Deutsche Bank's chief energy economist, in Washington. ``It would not surprise me if they meet soon to discuss these issues.''

Lebanese Unrest

Gun battles raged across western and southern Beirut, leaving 10 people dead, as fighters from the Shiite group Hezbollah pressed their party's challenge to Lebanon's pro- Western government. Oil surged to a record $78.40 on July 14, 2006, on concern fighting in Lebanon between Israel and Hezbollah would spread through the Middle East.

``The unrest in Lebanon could be very important,'' O'Grady said. ``This could be an early indication of further violence in coming months.''

Gasoline and heating oil also touched records in New York on forecasts for increased fuel demand. An Energy Department report on May 7 showed that U.S. inventories of distillate fuel, a category that includes heating oil and diesel, fell last week.

Record Fuel Prices

Heating oil for June delivery climbed 12.62 cents, or 3.6 percent, to close at a record $3.636 a gallon in New York. The contract reached $3.6524 today, an all-time high. Some traders use heating-oil futures to hedge their diesel and jet-fuel purchases.

Gasoline futures for June delivery rose 6.34 cents, or 2 percent, to $3.2012 a gallon in New York after reaching a record $3.2038 today.

U.S. pump prices followed futures higher. Regular gasoline, averaged nationwide, rose 2.6 cents to a record $3.671 a gallon, AAA, the nation's largest motorist organization, said today.

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