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Oil rises above US$86 after Fed bond buying move
Source: Agencies |
November 5, 2010, Friday
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Online Edition
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OIL settled above US$86 a barrel yesterday as the dollar weakened after the Federal Reserve said it will buy US$600 billion dollars of Treasury bonds to stimulate the U.S. economy.
Benchmark crude for December delivery rose US$1.80 to settle at US$86.49 a barrel on the New York Mercantile Exchange.
The announcement wasn't a surprise for markets but it underlined expectations that the dollar would weaken further and push up prices for commodities including oil.
The strength of the dollar and the price of oil are closely linked. The dollar has been getting weaker against other currencies for weeks, ahead of the Fed decision and will probably fall further as more dollars pour into the economy.
Oil is priced in dollars and becomes cheaper for holders of foreign currency when the dollar falls. Europeans, for example, get more dollars for their euros and can buy more oil for fewer euros. Since oil is cheaper for them, they buy more, sending up the dollar price of oil.
Energy traders expect this to happen, so they buy oil when the dollar falls, boosting the effect.
When the dollar weakens, investors would rather hold hard assets like oil and other commodities because hard assets protect them against more weakening and inflation.
"Effectively, what the Fed did yesterday was impose a new tax on (U.S.) consumers," Cameron Hanover analyst Peter Beutel said, noting that gasoline pump prices are going higher.
Oil prices hit a high for the year of US$87.15 a barrel in early May, when U.S. gas prices were around US$2.90 a gallon. They're heading back there again.
In other Nymex trading in December contracts on yesterday, heating oil added 4.52 cents to settle at US$2.3731 a gallon, gasoline gained 3.91 cents to settle at US$2.1771 a gallon and natural gas added 2 cents to settle at US$3.856 per 1,000 cubic feet.
In London, Brent crude climbed by US$1.62 to settle at US$88 a barrel on the ICE Futures exchange.
Benchmark crude for December delivery rose US$1.80 to settle at US$86.49 a barrel on the New York Mercantile Exchange.
The announcement wasn't a surprise for markets but it underlined expectations that the dollar would weaken further and push up prices for commodities including oil.
The strength of the dollar and the price of oil are closely linked. The dollar has been getting weaker against other currencies for weeks, ahead of the Fed decision and will probably fall further as more dollars pour into the economy.
Oil is priced in dollars and becomes cheaper for holders of foreign currency when the dollar falls. Europeans, for example, get more dollars for their euros and can buy more oil for fewer euros. Since oil is cheaper for them, they buy more, sending up the dollar price of oil.
Energy traders expect this to happen, so they buy oil when the dollar falls, boosting the effect.
When the dollar weakens, investors would rather hold hard assets like oil and other commodities because hard assets protect them against more weakening and inflation.
"Effectively, what the Fed did yesterday was impose a new tax on (U.S.) consumers," Cameron Hanover analyst Peter Beutel said, noting that gasoline pump prices are going higher.
Oil prices hit a high for the year of US$87.15 a barrel in early May, when U.S. gas prices were around US$2.90 a gallon. They're heading back there again.
In other Nymex trading in December contracts on yesterday, heating oil added 4.52 cents to settle at US$2.3731 a gallon, gasoline gained 3.91 cents to settle at US$2.1771 a gallon and natural gas added 2 cents to settle at US$3.856 per 1,000 cubic feet.
In London, Brent crude climbed by US$1.62 to settle at US$88 a barrel on the ICE Futures exchange.
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