Oil Rebounds on Rate Cut, Stock Rally

By: AP
By: AP

NEW YORK (AP) -- Oil prices bounded higher Tuesday after the Federal Reserve cut interest rates three-quarters of a percentage point and a rally on Wall Street raised energy investors' hopes for the economy.

Retail gas prices, meanwhile, slipped slightly for the second day in a row, while diesel prices rose further above $4 a gallon.

Oil was already higher, drawing support from the stock market's gains, when the Fed said it was lowering its key federal funds rate as it tries to stave off a severe economic crisis. Many investors expected a full point cut, but the Fed indicated it was concerned about higher inflation even as it was trying to shore up the economy.

Light, sweet crude for April delivery rose $3.74 to settle at $109.42 a barrel on the New York Mercantile Exchange.

In the past several months, rate cuts have fed oil price rallies as investors have bought crude futures to hedge against inflation and the falling dollar. Also, oil futures are priced in dollars, which makes them cheaper for foreign investors as the greenback falls.

That has sent crude to a series of records in recent weeks despite rising supplies and forecasts calling for lower demand growth this year. On Wednesday, the Energy Department is expected to report that the nation's crude supplies grew last week.

"A weak dollar and the associated appeal of the oil as an inflation hedge and safe haven could continue to offset bearish fundamentals for a few more weeks," said Jim Ritterbusch, president of Ritterbusch and Associates, in Galena, Ill., in a research note.

The rally in the stock market gave investors hope that the economy will weather the credit market problems that forced the Federal Reserve-backed sale of Bear Stearns Cos. to JPMorgan Chase & Co. The Dow Jones industrial average, which fluctuated after the Fed announcement but then moved higher, was boosted by better than expected earnings from Bear Stearns competitors Lehman Brothers Inc. and Goldman Sachs Group Inc.

Energy investors often view movements in equities markets as a proxy for the economy's health.

On Monday, oil prices plunged by $4.53 a barrel on concerns that Bear's collapse was a sign of deeper economic problems. That drop marked a rare departure for oil traders from the dollar-driven buying that has sent crude to record levels.

Steve Bellino, senior vice president for energy at MF Global LLC, agrees with many other analysts who feel oil prices aren't supported by the market's underlying supply and demand fundamentals, but thinks oil's Monday swoon was just a correction in a bull market rather than a sign market sentiment is turning.

"The ... market's run is not done yet," Bellino said.

That could be bad news for consumers. Gas prices followed oil futures to a series of records last week, though the national average price of a gallon of gas slid 0.3 cent to $3.28 a gallon Tuesday, according to AAA and the Oil Price Information Service. Prices are 73 cents higher than a year ago, and the Energy Department expects gas to peak near $3.50 a gallon in the spring as suppliers stock up before peak summer driving season. Some analysts see prices rising even higher, to $3.75 or $4 a gallon.

Gas prices are combining with high food prices and a downturn in the housing market to limit consumers' ability to spend, cutting retail sales, and have boosted prices of everything else. But crude's surge has also sent diesel and jet fuel prices climbing, hurting trucking firms and pushing airlines to consider mergers or steep capacity cuts.

Diesel rose 1.3 cents to a new record national average of $4.015 a gallon Tuesday. Delta Air Lines on Tuesday offered buyouts to 30,000 employees, about half its work force, and said it will cut domestic capacity 5 percent this year to cope with soaring fuel prices.

Other energy futures also rebounded Tuesday from steep declines in the previous session. April heating oil futures rose 6.95 cents to settle at $3.1379 a gallon while April gasoline futures rose 15.58 cents to settle at $2.66 a gallon.

April natural gas futures jumped 31.4 cents to settle at $9.414 per 1,000 cubic feet.

In London, May Brent crude futures rose $3.81 to settle at $105.56 a barrel on the ICE Futures exchange.

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Associated Press writers George Jahn in Vienna and Gillian Wong in Singapore contributed to this report.

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