/ 27 February 2008

Oil price hits new peak as dollar slumps

Oil powered to a new record above $102 a barrel on Wednesday, closing in on its inflation-adjusted lifetime peak, as an ailing dollar on worsening United States economic data triggered a surge across commodities markets.

US crude stood 15 cents higher at $101,03 a barrel by 1pm GMT, off its new record high of $102,08 and its 1980 inflation-adjusted peak of $102,53.

London Brent crude climbed 16 cents to $99,63 a barrel, after earlier hitting a record of $100,30.

The dollar slumped to an all-time low against the euro as well as a basket of major currencies after data from the US highlighted a gloomy outlook for that country’s economy, raising the spectre of more rate cuts.

A weak dollar can trigger commodities buying as investors seek to preserve their nominal value in other currencies.

The price of oil has risen by nearly 66% in the past year in US dollar terms, whereas in terms of euros, the rise has only been about 47%.

Analysts and investors also said that the US is seeing a sharp increase in inflation, after data showed that producer prices rose by 1% in January and by 7,4% on an annual basis, the biggest 12-month gain in more than 26 years.

”In this climate, therefore, people tend to buy real assets like oil and gold,” said Colin Morton, investment director at Rensburg Fund Managers.

Stagflation

Edward Meir at MF Global said the economic backdrop in the US now is similar to the stagflation of the late 1970s, which saw rising inflation and low growth.

”In this type of environment, commodities do quite well, since participants turn to hard assets to protect themselves against eroding purchasing power,” he said.

Barclays Capital raised its average oil price forecast for 2008 to $97,70 a barrel from $87,40 previously. Oil has averaged about $93,66 so far this year, up from $72,30 in 2007.

Most commodities markets pushed higher on Wednesday with gold hitting a new record high, and copper, aluminium and silver also hovering near multi-year peaks, underscoring their attraction to investors as a hedge against the dollar and an alternative to other financial markets.

Oil has also lately been supported by growing winter fuel demand in the US and Europe amid falling temperatures, and indications from the Organisation of the Petroleum Exporting Countries (Opec) that the exporter group will not increase production at its meeting next week.

”I think Opec will probably leave things as they are,” said Tom Nelson, analyst at Guinness Atkinson Funds.

On Tuesday, Opec’s president said members would agree not to raise production, in part because of fears of a demand slowdown.

In the US, crude oil supplies are forecast to have risen last week by 2,5-million barrels, the seventh increase in a row, as refineries undergoing maintenance have built up stocks.

A Reuters poll of industry analysts predicted US distillates stocks, including heating oil and diesel, would maintain their seasonal decline, down 2,1-million barrels, due to cold temperatures and a dip in production and imports.

The US government data was due at 3.30pm GMT on Wednesday. — Reuters