A Weak Dollar and Supply Concerns Carry Oil to Another Record High

Start the conversation

By Jason Simpkins
Associate Editor

Oil sailed to a fresh record Tuesday as the dollar's continued weakness made an already fashionable retreat into oil all the more appealing.

The price of light, sweet crude for May delivery settled at a record $113.79 a barrel after touching a new trading high of $113.99 a barrel in early morning electronic trading on the New York Mercantile Exchange.

"Traders on the Nymex saw the dollar take another tumble, so they did what they have been conditioned to do when the dollar falls, i.e. they bought crude oil," Stephen Schork wrote in his popular industry newsletter, the Schork Report.

The dollar hit its latest all-time high against the euro last Thursday, hitting $1.5832. Monday, Wachovia Corp. (WB), the fourth-largest U.S. bank, announced a surprise first-quarter loss. The company also slashed its dividend and revealed plans to raise $7 billion in capital. As a result investors have lost even more confidence in the financial sector, and by extension, the U.S. dollar.

"This news highlights the strains in the banking sector and credit markets and that has led to more dollar selling, and so that tends to drive investors into oil and other commodities," Viktor Shum, an analyst with Purvin & Gertz, told the Associated Press.

Story continues below…

Oil's price jump was also bolstered by the Organization of Petroleum Exporting Countries' decision to hold production steady and maintain its 2008 estimate for growth in world oil demand.

"The fundamental picture in the second quarter of 2008 appears to be in line with the typical seasonal pattern for this time of year," the group said in its April report. "Current OPEC production at more than 32 million barrels per day will be sufficient to both meet demand growth and contribute to further stockbuilds."

Despite strong demand from China and India and record high oil and gas prices, the members of OPEC, who control 40% of the world's oil supply, believe demand is still very much at risk.

"With growing concerns about the slowing U.S. economy and higher gasoline prices, there is a chance that the decline could be more pronounced, leading to even lower demand in the second quarter," the report noted.

U.S. inventories unexpectedly dropped in the week ended April 4, and Wednesday's report for last week is expected to show further declines.

News and Related Story Links: