Oil prices fall as dollar rises despite US Fed cut of key rate

The Associated Press   |  Thu, 05/01/2008 8:21 PM  |  Business

Oil prices fell slightly Thursday as the dollar strengthened against the euro despite a cut by the U.S. central bank in its key interest rate.

Light, sweet crude for June delivery fell 21 cents to US$113.25 a barrel in electronic trading on the New York Mercantile Exchange by early afternoon in Europe.

The contract fell US$2.17 on Wednesday to settle at US$113.46 a barrel after the U.S. government reported that crude inventories rose more than expected last week.

In London, Brent crude futures were down 29 cents to US$111.07 a barrel on the ICE Futures exchange.

The U.S. Federal Reserve said Wednesday it would cut the federal funds rate by a quarter percentage point to 2 percent. The dollar lost ground against both the euro and yen early in the
day, but later recovered and strengthened.

The 15-nation currency bought US$1.5520 in Europe, down from the US$1.5642 it purchased in New York late Wednesday. The British pound also drifted lower to US$1.9869 from US$1.9893.

"The full direction for the dollar will, however, likely wait for (Friday) ... because many European countries are on bank holiday," said Olivier Jakob of Petromatrix in a research note, referring to Labor Day or Ascension Day celebrations across the continent.

Interest rate cuts tend to weaken the dollar, and investors buy commodities such as oil as a hedge against inflation when the greenback falls. A weaker dollar also makes oil cheaper for
overseas buyers.

The wording of the statement accompanying the Fed's announcement, though, left traders wondering whether future cuts are likely. While signaling it is concerned about weak economic
growth, the central bank also cited worries about inflation - a risk propelled in large part by higher energy prices.

Oil prices fell Wednesday after the government reported a surprisingly large jump in crude oil and distillate fuel inventories last week.

In its weekly inventory report, the Energy Department's Energy Information Administration said crude oil inventories rose 3.8 million barrels, more than double the increase analysts surveyed
by energy research firm Platts had expected.

Inventories of distillates, which include heating oil and diesel fuel, rose 1.1 million barrels, more than seven times the expected increase.

Investors shrugged off a 1.5 million barrel decline in gasoline inventories. In part, that's because despite the drop, supplies of gasoline remain high for this time of year. Also, demand for gasoline fell slightly over the last four weeks, on average, compared with the same period last year, EIA data show.

In other Nymex trading, June heating oil futures fell 0.32 cent to US$3.1548 a gallon (3.8 liters) while gasoline prices gained 0.29 cent to US$2.9092 a gallon.

Natural gas futures added 5.4 cents to US$10.897 per 1,000 cubic feet.(**)

Copyright © 2008 The Jakarta Post - PT Bina Media Tenggara. All Rights Reserved.