Oil Hits $140 on Depleted Dollar and Supply Concerns

By Jason Simpkins
Associate Editor

Oil and gold each experienced a fresh resurgence yesterday (Thursday) - with crude achieving a new trading record - after the dollar weakened in response to the policy decisions by central banks around the world, and the Organization of Petroleum Exporting Countries' president said oil may reach $170 by the summer.

Gold jumped 3.7%, trading at a level of $915 an ounce for most of the day, while oil settled at all-time high of $139.64 a barrel, up $5.09, after setting record intraday high of $140.39 - its highest level since reaching a record $139.89 on June 16.

"I foresee prices probably between US$150 and US$170 this summer," OPEC President Chakib Khelil was quoted as telling a French television station. "That will probably decline a bit toward the end of the year."

Also, the head of Libya's national oil company said the country could cut crude production because the oil market is well supplied, Bloomberg News reported.

Another driving force behind the gains made by oil and gold was the depleted greenback, which tumbled after the U.S. Federal Reserve's decision to hold its key lending rate steady at 2.0%.

"The Fed said that inflation is a major concern, but they're not going to do anything about it, which made gold go ballistic," Leonard Kaplan, the president of Prospector Asset Management, told Bloomberg News. "The dollar is going to get slammed again."

After meeting Wednesday, the policymaking Federal Open Market Committee (FOMC) acknowledged that inflation as a growing problem, but also expressed its belief that an economic downturn would eventually blunt demand for goods and drive down prices.

"The committee expects inflation to moderate later this year and next year," the FOMC said in a statement.

While the Fed is content to sit back and measure the stimulative effect of its previously mandated rate cuts, Jean-Claude Trichet, chairman of the European Central Bank, is telegraphing a rate hike that will do even more damage to the U.S. dollar.

The greenback, which fell to $1.5758 against the euro in afternoon trading, will likely sink further after the central bank's Governing Council meets July 3, as the body is largely expected to raise its interest rate a quarter of a point to 4.25%.

"The Governing Council remains particularly concerned that current elevated inflation rates, which have proved higher than and more persistent than previously foreseen, may become entrenched in private inflation expectations and lead to second-round effects," Trichet told an economic committee of the European Parliament.

Even a minute ECB rate increase will significantly widen the gap between the euro and the dollar, and will further elevate commodity prices.  Oil, was up more than $4, or 3%, by midday, trading at $138 a barrel.

One of the many investors to voice concern over mounting inflationary pressures is Warren Buffett chairman of Omaha-based Berhshire Hathaway Inc. (BRK.A, BRK.B). 

"I think inflation is really picking up," Buffett told CNBC earlier this week. "We see it everyplace.  It's exploding."

Of course, many analysts believe the situation is out of Fed Chairman Ben S. Bernanke's hands at this point, contending that if he does raise rates to combat inflation, he will forfeit what little economic growth remains to be seen in the U.S. economy.

"In an environment of dislocated funding markets, a rate cut would not produce a recovery buy a rate hike could trigger recession," wrote Tullett Prebon economist Lena Komileva.

Indeed, Money Morning Investment Director Keith Fitz-Gerald said that institutional traders are at the flight controls of market prices right now - not the Fed.

"Every time the Fed goes up against institutional traders, the Fed loses," Fitz-Gerald said.

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