Oil rises, anticipating Fed rate cut

Analysts believe that an interest rate cut will ease worries about the U.S. economy and boost oil demand.

Oil prices rose Tuesday in anticipation that the U.S. Federal Reserve will cut interest rates later in the day, a move that would likely help the U.S. economy - the No. 1 oil consumer - and bolster demand for crude.

News of several crude oil pipeline shutdowns in the U.S. Midwest due to ice storms also supported prices.

Light, sweet crude for January delivery rose 38 cents to $88.24 a barrel in electronic trading on the New York Mercantile Exchange by midday in Europe. The contract had fallen 42 cents to settle at $87.86 a barrel on Monday.

In London, Brent crude futures rose 20 cents to $88.24 a barrel on the ICE Futures exchange.

The Federal Reserve is widely expected to lower its key rate, now at 4.5 percent, by a quarter of a percentage point - or perhaps more - to try to keep troubles in the housing and credit markets from sinking the economy.

"What's been weighing down on the crude oil futures market is concern about the U.S. economy," said Victor Shum, an energy analyst with Purvin & Gertz in Singapore. "If the expected cut indeed holds true or is actually larger, it will bolster the U.S. economic outlook, and that's supportive of oil pricing."

Others, however, said the rate cut would have to be something other than a quarter point to affect oil prices.

"Today all eyes will be on the Fed but with a 25-basis-point cut already priced in, it will take a surprise to move (Nymex oil) out of its current trading range," said Olivier Jakob of Petromatrix in Switzerland.

Dow Jones Newswires reported that several crude oil pipelines, including ones operated by Enbridge and Magellan Midstream Partners, were affected by power outages which forced them to shutdown. There were no estimates of when the pipelines were expected to restart.

Oil futures have dropped more than $10 from their highs in recent weeks as OPEC increased output and as demand slid in the face of high prices.

Several recent reports have suggested U.S. demand for oil and gasoline is falling even as OPEC is boosting production. Total production by the Organization of Petroleum Exporting Countries rose to 31.15 million barrels a day in November, up 40,000 barrels a day from October, according to Platts, the energy research arm of McGraw-Hill Cos. Analysts surveyed by Dow Jones Newswires predict the U.S. government will report on Wednesday that domestic oil inventories rose last week.

Some analysts expect oil futures to trade in a range around $90 until more evidence surfaces of either further demand erosion or supply growth. Others believe futures have begun a seasonal move that could take them as low as $70 a barrel.

"It's nearly the end of the year and many investors are booking profits to boost their annual returns and hence their annual bonuses," Shum said. "Given that, I don't think we're going to rally to $100 a barrel again in the remaining weeks of this year unless there are some unexpected events."

Many analysts have blamed the weakening dollar, in part, for oil's run-up to nearly $100 a barrel last month. The dollar's continuing decline against the euro and other currencies makes oil look more attractive to foreign investors.

Heating oil futures rose 0.78 cents to $2.4852 a gallon (3.8 liters) while gasoline prices rose 0.23 cent to $2.2524 a gallon. Natural gas futures added 6.9 cents to $7.101 per 1,000 cubic feet.

Source - CNN Money