China rate increase sends oil lower

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NEW YORK – Oil prices fell about 2 percent Tuesday after China surprised markets by raising interest rates in an attempt to cool its red-hot economy.
Benchmark oil for November delivery was down $1.78, or 2 percent, to $81.38 a barrel on the New York Mercantile Exchange.

Investors had been pushing oil prices higher since the U.S. Federal Reserve indicated in late August that it’s prepared to pour more money into the nation’s economy to spur growth. That led to a steep weakening of the dollar. Because oil is priced in dollars, when the dollar falls, oil gets cheaper for holders of foreign currency, so they buy more oil and send prices higher.

The Chinese rate increase of 0.25 percent, its first such move in nearly three years, had the effect of strengthening the dollar, and investors sent prices of crude oil, gasoline, and heating oil lower. They also bailed out of other commodities like gold.

«It took the wind out of the sales of the oil market,» said Phil Flynn, senior energy analyst at PFGBest in Chicago. «It gave the dollar some momentum and commodity traders moved for the exits.»

The dollar rose 1.34 percent against an index of foreign currencies.

Oil has been trading in concert with the U.S. stock market recently, and that trend continued. The Dow Jones Industrial Average lost 114 points, or 1 percent, in morning trading.

Gasoline prices fell even more sharply than oil, nearly 3 percent to about $2.09 cents a gallon. Gasoline prices had been pushed higher with oil prices, and also because strikes at oil refineries in France had made investors nervous about supply disruptions.

Though strikes continued Tuesday, concerns over supply disruptions were overwhelmed by the effects of the rising dollar.

Gasoline pump prices were flat overnight at a national average of $2.829 a gallon, according to auto club AAA, Wright Express and Oil Price Information Service. A gallon of regular unleaded is 9.8 cents more expensive than a month ago and 26.5 cents higher than a year ago.

Investors have pushed oil prices higher in spite of abundant supplies in the U.S. in part because of expected demand from China’s growing economy. «If you start to raise interest rates in China and their economy slows, then global inventories suddenly look higher,» said Flynn.

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An oil supply report from the Energy Department’s Energy Information Administration — the market benchmark — will be out on Wednesday.

«High oil inventories combined with sluggish demand conditions in most advanced economies are expected to keep the oil market in surplus over the rest of 2010,» said National Australia Bank, which forecasts crude will average $78 a barrel in the fourth quarter.

Heating fell 5 cents to $2.2289 a gallon. In London, Brent crude fell $1.69 to $82.68 a barrel on the ICE Futures exchange.

Natural gas, on the other hand rose about 2 percent, to $3.497 per thousand cubic feet. Natural gas is insulated by global supply and demand trends because so much is produced domestically. High supplies have kept prices relatively low. Analysts say investors have been selling gas when oil prices go up, and are now buying as oil is falling.

AP

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