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Crude prices rise as the dollar weakens

THE effect of the weak dollar is again pushing oil prices higher in the face of little demand for energy and huge surpluses of crude.

Since March, the dollar index, which weighs the US currency against a basket of foreign currencies like the euro, the Japanese yen, the pound and the Swiss franc, has fallen nearly 12 percent. In that same period, crude has jumped 81 percent.

The dollar fell against the pound and the Japanese yen yesterday and crude prices climbed higher. That's because crude is bought and sold in dollars, so it essentially becomes cheaper when the US currency is weak.

Benchmark crude for October delivery rose 25 cents to settle at US$72.74 on the New York Mercantile Exchange. Oil prices earlier this week hit US$75, a high for the year.

The widening gap between the value of a dollar and a barrel of oil shows just how much oil-based index funds have come to affect what consumers pay for energy.

Oil prices threatened to hit new highs for 2009 this week, even though the government reported Wednesday that more unused crude is being placed into storage. The US is also nearing the end of the driving season, so people will likely be buying less gasoline in the coming weeks.

Gasoline futures still rose yesterday.

Gas sales are way down this year, even though it costs about a dollar less for each gallon compared with last year.

Overnight, retail gasoline fell nearly a penny to US$2.613. That's a dime more than gas cost a month ago, largely because refineries have cut production to match falling demand.

It's difficult to predict how long oil prices can remain at current levels when so little of it is being used. Yet the value of a barrel of oil will likely remain elevated as long as investors are skittish about the health of banks and other businesses.

Money under control of the Federal Deposit Insurance Corp. has been severely depleted by the wave of collapsing financial institutions. Some analysts warn the FDIC, which guarantees bank deposits, could be losing money by the end of the year.

To a lot of big investors, oil looks like a pretty safe place to park money right now.

"Oil became a safe haven as traders (who) lost confidence in the US banking system ran to oil to protect themselves from the deteriorating economic world around us," said PFGBest analyst Phil Flynn. "Some critics now call that excessive speculation, but what I call it is reflection of the reality. You have to remember the value of any commodity when expressed in a currency will ultimately be determined by the confidence and faith in that underlying instrument."

It seems nothing can prop up prices for natural gas, which hit seven-year lows this week. There is so much gas being pumped into the ground that the US is running out of places to store it. That is largely because big energy users, like manufacturers, have cut back severely on operations as they ride out the recession.

Natural gas prices fell 17.3 cents to settle at US$3.033 per 1,000 cubic feet.

Oil saw similar run-ups in storage earlier this year when prices were around US$40 per barrel. Major oil-producing nations have since cut back on exports, which has helped prop up prices, yet storage facilities are still stuffed with crude.

In other Nymex trading, gasoline for September delivery rose 3.04 cents to settle at US$2.0618 a gallon and heating oil rose less than a penny to settle at US$1.8603 a gallon.

In London, Brent crude rose 28 cents to settle at US$72.79.


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