US crude heads up towards $80

US crude heads up towards $80
Reuters Published: September 18, 2007, 00:27

London: Oil shrugged off early losses to head back near $80 yesterday, within sight of its record high, as the market focused on a US Federal Reserve meeting that is widely expected to cut interest rates.

The US central bank is expected today to cut its benchmark federal funds rate by at least a quarter percentage point to help markets hobbled by a credit crunch.

Investors are increasingly concerned about the potential for the credit crunch to slow the U.S. economy and dent demand for fuel in the world's top consumer.

US crude rose 75 cents to $79.85 by 1530 GMT, off lows of $78.25 hit earlier in the session after worries that a tropical storm in the Gulf of Mexico could hit rigs and refineries faded away.

It had hit a fresh record of $80.36 a barrel on Friday.

London Brent crude was 47 cents up at $76.69.

"If the Fed cuts rates this week, the macro economic view could be seen as improving for energies, especially if the dollar remains under pressure," said Mike Fitzpatrick of MF Global. "We're going to see a lot of volatility until the meeting," added Olivier Jakob of Petromatrix.

Oil is also receiving support from fresh geopolitical concerns over Iran's nuclear programme.

France's Foreign Minister Bernard Kouchner increased pressure on Tehran on Sunday, saying that France had to prepare for the prospect of war with Iran. Iran has called the comments provocative.

US Treasury Secretary Henry Paulson said yesterday he expected market turbulence to continue for a while, but said the current volatility was occurring against the backdrop of global financial strength.

Opec

The Organisation of Petroleum Exporting Countries (Opec) is also concerned that turmoil in the financial market could erode fuel consumption and considerable uncertainty over supply and demand made it difficult to determine oil output policy.

The producer group agreed a supply increase last week, but analysts said the decision to raise output by 500,000 barrels per day (bpd) from November 1 was not enough to reverse a rally that has lifted prices by 29 per cent this year.

Investment bank Goldman Sachs said yesterday Opec's decision to boost output was not enough to mute bullish sentiment, as it forecast US oil prices will surge to $85 by the end of 2007. "We believe that this will be too little, too late ... and now expect inventories to draw to critical levels this winter," the bank said in a report.

Storm: Prices fell initially as hurricane fears fade

Oil fell earlier yesterday as Ingrid, the ninth named storm of the 2007 hurricane season, was downgraded to a depression.

Three refineries in Texas shut by the previous Gulf of Mexico storm were working to restore operations.

Hurricane and other supply risks, together with falling US oil inventories and fund flows into energy from poorly performing equity markets, helped drive oil to its all-time high on Friday.