Defying a bearish inventory report on the domestic front, U.S. crude oil futures broke away from supply-and-demand fundamentals to soar above $83 on the New York Mercantile Exchange Wednesday, spurred by market talk focused on a movement in interest rates.
Led by a weaker dollar, cold fronts and other geopolitical factors, oil prices have already broken new ground in 2010.
Extending gains for a tenth trading session on the NYMEX, the price of light, sweet crude oil for February delivery gathered momentum after an initial sell-off to close at $83.18 a barrel. Earlier in the session, crude tested the $80-pointmark on bearish inventory data, but oil futures ultimately surged to the upside.
Today, the Energy Information Administration's weekly inventory report showed an unexpected climb in crude stocks by 1.3 million barrels to 327.3 million barrels in the week to Jan. 1. A far cry from the EIA's data, both a Reuters poll of analysts and the API's forecast showed crude inventories down by 500,000 barrels and 2.3 million barrels, respectively.
Under the EIA's spot light, the NYMEX delivery hub in Cushing, Oklahoma added 1.2 million barrels to its inventory.
On the other side of the energy coin, natural gas spot prices at the Henry Hub for February delivery gained 37 cents to close above the energy commodity's new contract threshold at $6.009 per thousand cubic feet.
Market Snaps Up Oil as Fed Mulls Rates
At the Federal Reserve's December meeting, fears surfaced over the fragility of the recovering U.S. economy, as well as potential harm to the housing sector due to waning purchases of mortgage securities, Reuters reported.
The Fed's concerns have added recent pressure to the greenback, which continued to gain over other currencies at the close of 2009 prompted by the promise of an improving economy. Today, oil gathered strength at the expense of a weakening U.S. currency.
"Oil seemed to get caught up in the commodity rush," noted Phil Flynn, vice president in charge of research at PFG Best, a futures brokerage in Chicago. "Yes, oil is strong because of the cold weather, but really the market rallied to a new high today primarily because of the lowered expectations for when interest rates will rise."
Flynn explained, "If we are going to talk about all the major factors that drove oil up today, interest rates played a big role. At the end of last week, there was almost a 78%-80% chance that we were going to see an interest rate increase in June, according to Fed Fund Futures, but that continues to drop -- it fell below a 48% chance, and that's a substantial fall in just a couple of days."
"When you have that kind of change in attitude about the marketplace and when rates are going to rise, it's going to have a major impact on oil," the analyst added. "If they [the Fed] keep the status quo in place when it comes to rate policy and quantitative easing, we know from past performance that tends to be very bullish for the price of oil."
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