Crude Oil Reaches Record $90 After Dollar Drops Against Euro

By Gavin Evans

Oct. 19 (Bloomberg) -- Crude oil rose to a record $90 a barrel in New York after the U.S. dollar fell against the euro, enhancing the appeal of commodities as an investment.

Investors purchased oil on speculation the Federal Reserve will cut borrowing costs to bolster the U.S. economy when the bank next meets Oct. 31. Interest-rate futures show a 70 percent likelihood the Fed will lower its target rate for overnight loans a quarter-percentage point to 4.5 percent.

``There's still no end in sight in terms of what people are willing to pay,'' said Bob Frye, commodity broker at Access Futures & Options Trading in Woodlake, California. ``With the weakness in the dollar'' we may get to $96 if prices stay much above $90, he said.

Crude oil for November delivery reached $90.02 a barrel in after-hours electronic trading on the New York Mercantile Exchange, the highest price since trading began in 1983. It was at $89.56 at 8:45 a.m. in Singapore.

The contract rose $2.07, or 2.4 percent, to $89.47 yesterday, a record close.

Oil futures set records the past four days on concern supplies from northern Iraq may be disrupted if Turkey takes military action against Kurdish rebel bases in the region.

``There's nothing really to support prices at these levels,'' said Gerard Burg, minerals and energy economist at National Bank of Australia Ltd. ``Fundamentally, we're in a period when U.S. demand should be slowing down and when you're not having hurricane issues in the Gulf of Mexico.''

Brent, Turkey

Brent crude oil for December settlement rose $1.47, or 1.8 percent, to $84.60 on the London-based ICE Futures Europe exchange yesterday. It was a record close. Futures touched $84.80, the highest since trading began in 1988.

Turkish lawmakers this week cleared Prime Minister Recep Tayyip Erdogan to authorize one or more military assaults against Kurdish rebel bases in Iraq within a year. Iraq will halt its oil exports through Turkey if attacked, Foreign Minister Hoshyar Zebari said yesterday.

``It doesn't look like anything is imminent but it does make the situation more unstable,'' Peter Beutel, president of Cameron Hanover Inc., a New Canaan, Connecticut, energy consultant, said yesterday. The sliding dollar has also had an ``immediate effect'' on oil prices, he said.

A lower dollar makes oil relatively cheaper in the countries using other currencies. In U.S. dollars, West Texas Intermediate, the New York-traded crude-oil benchmark, is up 46 percent so far this year. Oil is up 35 percent in euros, 40 percent in British pounds and 42 percent in yen.

Oil, Gold Rally

Oil's rally, and similar move in gold is being fueled by demand for ``non-U.S. dollar assets'' rather than a general move back into commodities, National Australia's Burg said.

Another rate cut by the Fed at the end of the month would lower the dollar and may push oil to $100 if the rally hasn't broken before then, he said.

Record oil prices are being driven by speculation more than political events or demand, Nigerian Minister of State for Petroleum H. Odein Ajumogobia said yesterday.

``There's nothing to indicate why other than forward buying,'' Ajumogobia said in an interview. A further increase in supply by OPEC may be ``worth looking at'' he said, noting the latest rally follows forecasts for a mild winter in the Northern Hemisphere.

The Organization of Petroleum Exporting Countries, agreed last month to produce an extra 500,000 barrels a day starting Nov. 1 to meet rising demand. World oil consumption peaks in the fourth quarter when refiners make heating fuel for winter.

Winter Risks

``What they did a month ago is too little, too late,'' former Saudi Arabian oil minister Sheikh Ahmad Zaki Yamani said at a London conference organized by the Centre for Global Energy Studies yesterday. More OPEC oil is needed ``to reduce tension in the market as we approach winter.''

Surging oil prices caused the profit margin, or crack spread, for making gasoline and heating oil to fall 14 percent to $4.4702 a barrel yesterday, the lowest since Sept. 20, 2006, based on closing futures prices in New York. It reached $30.479 a barrel on May 17, the highest since at least 1989.

While refiners will be trying to temper their oil use, reduced demand and rising stockpiles may not be enough to counter the ``irrational exuberance'' of investors, National Australia's Burg said.

``You can really only cut production so far if you're making heating oil at the moment,'' he said. ``You wouldn't want to be out of that market for too long.''