Oil steadies above mid-US$102 a barrel after surge to new record

The Associated Press , Singapore | Tue, 03/04/2008 3:52 PM | Headlines

Oil prices held steady Tuesday in Asia after blasting overnight to a new record near US$104 a barrel and then falling back.

Oil futures - propelled by the weak U.S. dollar - climbed past US$103.76 a barrel Monday on the New York Mercantile Exchange, breaking what many analysts consider to be the true record high for oil after the US$38 per barrel price from 1980 is adjusted for inflation.

"Every other day, we've got a new record," said Victor Shum, an energy analyst with Purvin & Gertz in Singapore. "It's due to the phenomenon of investors getting into commodities, the hard assets, to find a safer haven and a hedge against inflation."

On Tuesday, light, sweet crude for April delivery rose 19 cents to US$102.64 a barrel in Asian electronic trading by midafternoon in Singapore. The contract hit US$103.95 a barrel Monday before retreating to settle at US$102.45, up 61 cents from the end of last week.

Oil's most recent run into record territory has been driven by the greenback's slump against other world currencies.

"This surge in oil futures is primarily driven by the U.S. dollar's movements," Shum said. "The U.S. dollar (Monday) reached a record low against the euro in the entire history of the euro, and that has caused oil to reach a new high."

The dollar's brief decline to historic levels Monday was spurred by news that construction spending in the U.S. took its biggest nosedive in 14 years.

Crude futures offer a hedge against a falling dollar, and oil futures bought and sold in dollars are more attractive to foreign investors when the dollar is falling. Gold, copper and wheat are among the other commodities that have rallied as the dollar has fallen.

Investors are also keeping an eye on OPEC, which meets Wednesday to consider production levels. Most expect the Organization of Petroleum Exporting Countries to hold output steady.

"It's going to be a nonevent," Shum said. "With pricing above US$100, it's politically unacceptable to cut production even though fundamentals are weakening."

Analyst estimates for where oil goes from here vary widely. Some predict an eventual decline to the US$65 or US$70 range as supplies continue to grow and demand falls. Others see prices rising as high as US$120 as investment capital continues to flow into oil.

Shum said investor demand for commodities was likely to remain strong in the near term amid expectations that further interest rate cuts by the U.S. central bank will keep the greenback from strengthening.

"Looking at the momentum, I think oil could go higher in the near term," he said.

Shum warned, though, that underlying fundamentals of oil supply and demand do not justify the price surge.

That "points to a risk that the price may fall sharply because it appears to be a price bubble that could potentially collapse," he said.

In other Nymex trading, heating oil futures fell 0.98 cent to US$2.831 a gallon (3.8 liters) while gasoline prices dropped 1.31 cents to US$2.6589 a gallon. Natural gas futures rose 0.5 cent to US$9.351 per 1,000 cubic feet.

In London, Brent crude futures rose 33 cents to US$100.81 a barrel on the ICE Futures exchange. (***)

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