Update 9: Crude Oil Prices Slip Below $48 a Barrel

11.09.2004, 11:26 AM

Crude oil futures prices slipped below $48 a barrel on Tuesday as traders awaited U.S. oil inventory data, but analysts said the market fundamentals were pointing to higher prices in the coming weeks.

Shortly after floor trading resumed on the New York Mercantile Exchange, December crude was trading at $47.80, down 78 cents. That was its lowest since Sept. 21, when it traded at $46.76.

Brent crude was down $1.54 after the resumption of floor trading on the International Petroleum Exchange, fetching $44.38 - the lowest since Sept. 23, when it touched $43.65

Nymex oil prices are more than 13 percent below their record-high closing of $55.17 a barrel on Oct. 22 and Oct. 26.

Commercially available inventories of crude in the United States have risen for six straight weeks, pushing down prices, and analysts expected the U.S. Energy Department to report another supply increase when it releases weekly data Wednesday.

Extra barrels of crude are coming into the U.S. market from abroad, and daily oil output in the Gulf of Mexico is recovering from damage caused by Hurricane Ivan in mid-September.

"Inventories are building up, the only way it will fall is if there is a major terrorist threat or attack," said Ng Weng Hoong, oil strategist at Energyasia.com in Singapore.

Still, the market remains jittery due to the world's limited excess production capacity, which means there is little room to maneuver if there is a prolonged output disruption. The supply cushion is only about 1 percent of the 82.4 million barrels consumed daily worldwide.

Traders remain glued to developments in Iraq and Nigeria, two key exporters that are vulnerable to disruptions in supply.

In Iraq, U.S. forces are pounding the insurgent stronghold of Fallujah in what is expected to be a drawn-out assault to weed out Islamic extremists. Militants have vowed to disrupt Iraq's badly needed oil exports, and a northern pipeline already has been knocked out by saboteurs.

In Nigeria, the labor minister warned Monday that oil workers who participate in next week's planned general strike aimed at halting the country's exports risk losing their jobs. Nigeria is America's fifth-largest source of crude oil.

Some traders believe that U.S. refineries - coming out of pre-winter maintenance - will have enough time to ramp up production of heating oil ahead of the Northern Hemisphere winter, staving off an immediate surge in prices.

Heating oil for December was slightly lower Tuesday afternoon in Europe at $1.3490, while natural gas dropped 26.1 cents to $7.339 per 1,000 cubic feet.

However, traders and analysts said it's too early to declare the end of high oil prices this year.

"We're in a period of consolidation. ... Once it comes down a bit (more), buyers are going to go back in strong," said Ng. "The fundamentals are all there. Demand is still strong, supply is dicey."

In London, Paul Horsnell, head of energy research at Barclays Capital, also said markets could turn bullish soon.

"There is still no flexibility upstream, downstream, midstream," he said. "The whole system is creaking."

"This is just a lull," he said, suggesting that prices will likely again rise within weeks, as the Northern Hemisphere cold season sets in. For oil markets, he said, "winter doesn't come in November, it comes in December."

Oil prices would have to surpass $90 per barrel to match the inflation-adjusted peak set in 1980.

Rates rise increases to continue

10.11.2004

WASHINGTON - Another small hike in United States interest rates is seen as a certainty when Federal Reserve policy-makers meet today.

Since policy-setting members of the Federal Open Market Committee began raising rates in June, they have edged up the federal funds rate, charged on overnight loans between banks, three times, to 1.75 per cent.

Analysts agree almost unanimously that another increase will be announced today to bring the fed funds rate to 2 per cent and there is a growing consensus that the increases will continue.

"There is still an enormous adjustment to be made considering that we have an economy that is approaching its full potential," said economist Richard DeKaser of National City, Cleveland.

"At the same time, inflation is no longer declining and, in fact, has been rising and, in all likelihood, is back within the Fed's 'comfort zone' of 1.5 to 2 per cent."

Economic growth, measured by gross domestic product, has been at an annual rate of more than 3 per cent for the past six quarters.

The Fed's job is to protect the economy's ability to grow by tuning monetary policy to keep interest rates at levels that dampen the potential for runaway inflation.

DeKaser noted that a so-called "neutral" level for interest rates - which neither hampers growth nor fosters inflation - is generally considered to be about 2 per cent above prevailing price rises, meaning around 3.5 per cent to 4.5 per cent at present.

That means the expected 2 per cent federal funds rate likely to be in place after today's meeting is only one step, and another will follow next month.

New York-based economist Ram Bhagavatula, of the Royal Bank of Scotland, said that "with the US economy showing the resilience it has through 2004 and the distance between where the fed funds rate target is, relative to where it needs to be, still sizeable, the measured pace of policy adjustment is not likely to pause any time soon".

The Fed's generally accepted position is that its actions since June are intended only to get official rates back to more normal levels, after dropping them to a 46-year low of 1 per cent.

After each rate-rising meeting, policymakers have emphasised that "even after this action ... the stance of monetary policy remains accommodative", so there is more room to go before reaching a balanced rate.

Fed chairman Alan Greenspan famously said policymakers would not know when a neutral rate was reached "until we get there". Rather than being facetious, his remark recognised the fluid state of economic activity.

Until last week's surprisingly robust report on the nation's labour market - showing 337,000 jobs created last month plus 113,000 more than previously thought in August and September - many had thought there might be a pause in rate rises after this week.

Few think so now.

- REUTERS