The price of a barrel of oil has passed the $122 mark for the first time.

US light crude hit a fresh high of $122.73 in New York trading, while London’s Brent crude has passed $120 for the first time, hitting $120.99. Oil has been rising because of fears over possible supply disruptions in Nigeria and in northern Iraq and predictions of higher US demand. Economists warn higher oil prices are continuing to drag on global economies already weakened by the credit crunch. Oil has continued to hit record levels since it reached $100 a barrel for the first time in January 2008. It has risen by 25% in the last four months and by about 400% in the last seven years.

The sentiment is that the oil pricing is likely going to stay quite strong, with a lot of volatility: Victor Shum, oil analyst

Royal Dutch Shell’s production from Nigeria is down by about 164,000 barrels a day after its pipelines suffered a series of attacks by militant groups. Meanwhile in Northern Iraq, Turkish forces have renewed cross-border raids against Kurdish insurgents. Optimism about the prospects for the US economy which may increase demand for oil, boosted the oil price in Asian trading. “The bulls are in control of the market,” said Victor Shum, energy analyst at Purvin & Gertz in Singapore. “The economic report out of the US [on Monday] on the service sector seems to suggest the economic slowdown may not be as deep as initially thought,” he said. “The sentiment is that the oil pricing is likely going to stay quite strong, with a lot of volatility,” Mr Shum said.

Analysts at Goldman Sachs predicted oil could reach between $150 to $200 over the next six months to two years in a report on Monday.

If oil prices stayed at current levels of $120 or rose further to $150, this would have “serious consequences” for the strength of the economy, economic forecasters said. Economists from the Ernst & Young Item Club said their forecasts for the recovery of the UK economy were based on oil prices below $100 a barrel. “If it hits $200 per barrel, as one Opec minister recently predicted, then frankly, all bets may well be off,” said Hetal Mehta, Item Club economist. Demand for oil from the fast-expanding economies of India and China is one of the key long-term factors that has boosted the price of the commodity. China will take further steps to secure a greater future supply of oil this week when it signs a deal with oil-producer Venezuela to build a refinery jointly in Guangdong province. Under the deal, Venezuela will supply China with 400,000 barrels a day, five times the current amount. “We want to co-operate with foreign firms in both the upstream and downstream business to take advantage of our respective strengths and secure steady oil supplies,” said Shen Diancheng, vice-president of the largest Chinese oil and gas firm, Petrochina. The company is also in talks with Qatar about building a refining and petrochemical complex in eastern China. Last month, Petrochina signed a 25-year pact with Qatar to secure supply of liquified natural gas from the Gulf nation.

The price of crude oil today is not made according to any traditional relation of supply to demand. It’s controlled by an elaborate financial market system as well as by the four major Anglo-American oil companies. As much as 60% of today’s crude oil price is pure speculation driven by large trader banks and hedge funds. It has nothing to do with the convenient myths of Peak Oil. It has to do with control of oil and its price. How?
 
First, the crucial role of the international oil exchanges in London and New York is crucial to the game. Nymex in New York and the ICE Futures in London today control global benchmark oil prices which in turn set most of the freely traded oil cargo. They do so via oil futures contracts on two grades of crude oil-West Texas Intermediate and North Sea Brent.
 
A third rather new oil exchange, the Dubai Mercantile Exchange (DME), trading Dubai crude, is more or less a daughter of Nymex, with Nymex President, James Newsome, sitting on the board of DME and most key personnel British or American citizens.
 
Brent is used in spot and long-term contracts to value as much of crude oil produced in global oil markets each day. The Brent price is published by a private oil industry publication, Platt’s. Major oil producers including Russia and Nigeria use Brent as a benchmark for pricing the crude they produce. Brent is a key crude blend for the European market and, to some extent, for Asia.
 
WTI has historically been more of a US crude oil basket. Not only is it used as the basis for US-traded oil futures, but it’s also a key benchmark for US production. 
 
 
‘The tail that wags the dog’
 
All this is well and official. But how today’s oil prices are really determined is done by a process so opaque only a handful of major oil trading banks such as Goldman Sachs or Morgan Stanley have any idea who is buying and who selling oil futures or derivative contracts that set physical oil prices in this strange new world of “paper oil.”
 
With the development of unregulated international derivatives trading in oil futures over the past decade or more, the way has opened for the present speculative bubble in oil prices.
 
Since the advent of oil futures trading and the two major London and New York oil futures contracts, control of oil prices has left OPEC and gone to Wall Street. It is a classic case of the “tail that wags the dog.”
 
A June 2006 US Senate Permanent Subcommittee on Investigations report on “The Role of Market Speculation in rising oil and gas prices,” noted, “there is substantial evidence supporting the conclusion that the large amount of speculation in the current market has significantly increased prices.”
 
 
What the Senate committee staff documented in the report was a gaping loophole in US Government regulation of oil derivatives trading so huge a herd of elephants could walk through it. That seems precisely what they have been doing in ramping oil prices through the roof in recent months.
 
The Senate report was ignored in the media and in the Congress.
 
The report pointed out that the Commodity Futures Trading Trading Commission, a financial futures regulator, had been mandated by Congress to ensure that prices on the futures market reflect the laws of supply and demand rather than manipulative practices or excessive speculation. The US Commodity Exchange Act (CEA) states, “Excessive speculation in any commodity under contracts of sale of such commodity for future delivery . . . causing sudden or unreasonable fluctuations or unwarranted changes in the price of such commodity, is an undue and unnecessary burden on interstate commerce in such commodity.”
 
Further, the CEA directs the CFTC to establish such trading limits “as the Commission finds are necessary to diminish, eliminate, or prevent such burden.” Where is the CFTC now that we need such limits?
 
They seem to have deliberately walked away from their mandated oversight responsibilities in the world’s most important traded commodity, oil.
 
Enron has the last laugh
 
As that US Senate report noted:
 
“Until recently, US energy futures were traded exclusively on regulated exchanges within the United States, like the NYMEX, which are subject to extensive oversight by the CFTC, including ongoing monitoring to detect and prevent price manipulation or fraud. In recent years, however, there has been a tremendous growth in the trading of contracts that look and are structured just like futures contracts, but which are traded on unregulated OTC electronic markets. Because of their similarity to futures contracts they are often called “futures look-alikes.”
 
The only practical difference between futures look-alike contracts and futures contracts is that the look-alikes are traded in unregulated markets whereas futures are traded on regulated exchanges. The trading of energy commodities by large firms on OTC electronic exchanges was exempted from CFTC oversight by a provision inserted at the behest of Enron and other large energy traders into the Commodity Futures Modernization Act of 2000 in the waning hours of the 106th Congress.
 
The impact on market oversight has been substantial. NYMEX traders, for example, are required to keep records of all trades and report large trades to the CFTC. These Large Trader Reports, together with daily trading data providing price and volume information, are the CFTC’s primary tools to gauge the extent of speculation in the markets and to detect, prevent, and prosecute price manipulation. CFTC Chairman Reuben Jeffrey recently stated: “The Commission’s Large Trader information system is one of the cornerstones of our surveillance program and enables detection of concentrated and coordinated positions that might be used by one or more traders to attempt manipulation.”
 
In contrast to trades conducted on the NYMEX, traders on unregulated OTC electronic exchanges are not required to keep records or file Large Trader Reports with the CFTC, and these trades are exempt from routine CFTC oversight. In contrast to trades conducted on regulated futures exchanges, there is no limit on the number of contracts a speculator may hold on an unregulated OTC electronic exchange, no monitoring of trading by the exchange itself, and no reporting of the amount of outstanding contracts (”open interest”) at the end of each day.” 
 
Then, apparently to make sure the way was opened really wide to potential market oil price manipulation, in January 2006, the Bush Administration’s CFTC permitted the Intercontinental Exchange (ICE), the leading operator of electronic energy exchanges, to use its trading terminals in the United States for the trading of US crude oil futures on the ICE futures exchange in London ­ called “ICE Futures.”
 
Previously, the ICE Futures exchange in London had traded only in European energy commodities ­ Brent crude oil and United Kingdom natural gas. As a United Kingdom futures market, the ICE Futures exchange is regulated solely by the UK Financial Services Authority. In 1999, the London exchange obtained the CFTC’s permission to install computer terminals in the United States to permit traders in New York and other US cities to trade European energy commodities through the ICE exchange.
 
The CFTC opens the door
 
Then, in January 2006, ICE Futures in London began trading a futures contract for
 
West Texas Intermediate (WTI) crude oil, a type of crude oil that is produced and delivered in the United States. ICE Futures also notified the CFTC that it would be permitting traders in the United States to use ICE terminals in the United States to trade its new WTI contract on the ICE Futures London exchange. ICE Futures as well allowed traders in the United States to trade US gasoline and heating oil futures on the ICE Futures exchange in London.
 
Despite the use by US traders of trading terminals within the United States to trade US oil, gasoline, and heating oil futures contracts, the CFTC has until today refused to assert any jurisdiction over the trading of these contracts. 
 
 
 
Persons within the United States seeking to trade key US energy commodities ­ US crude oil, gasoline, and heating oil futures ­ are able to avoid all US market oversight or reporting requirements by routing their trades through the ICE Futures exchange in London instead of the NYMEX in New York.
 
Is that not elegant? The US Government energy futures regulator, CFTC opened the way to the present unregulated and highly opaque oil futures speculation. It may just be coincidence that the present CEO of NYMEX, James Newsome, who also sits on the Dubai Exchange, is a former chairman of the US CFTC. In Washington doors revolve quite smoothly between private and public posts.
 
A glance at the price for Brent and WTI futures prices since January 2006 indicates the remarkable correlation between skyrocketing oil prices and the unregulated trade in ICE oil futures in US markets. Keep in mind that ICE Futures in London is owned and controlled by a USA company based in Atlanta Georgia.
 
In January 2006 when the CFTC allowed the ICE Futures the gaping exception, oil prices were trading in the range of $59-60 a barrel. Today some two years later we see prices tapping $120 and trend upwards. This is not an OPEC problem, it is a US Government regulatory problem of malign neglect.
 
By not requiring the ICE to file daily reports of large trades of energy commodities, it is not able to detect and deter price manipulation. As the Senate report noted, “The CFTC’s ability to detect and deter energy price manipulation is suffering from critical information gaps, because traders on OTC electronic exchanges and the London ICE Futures are currently exempt from CFTC reporting requirements. Large trader reporting is also essential to analyze the effect of speculation on energy prices.”
 
The report added, “ICE’s filings with the Securities and Exchange Commission and other evidence indicate that its over-the-counter electronic exchange performs a price discovery function — and thereby affects US energy prices — in the cash market for the energy commodities traded on that exchange.”
 
 
Hedge Funds and Banks driving oil prices
 
In the most recent sustained run-up in energy prices, large financial institutions, hedge funds, pension funds, and other investors have been pouring billions of dollars into the energy commodities markets to try to take advantage of price changes or hedge against them. Most of this additional investment has not come from producers or consumers of these commodities, but from speculators seeking to take advantage of these price changes. The CFTC defines a speculator as a person who “does not produce or use the commodity, but risks his or her own capital trading futures in that commodity in hopes of making a profit on price changes.”
 
The large purchases of crude oil futures contracts by speculators have, in effect, created an
 
additional demand for oil, driving up the price of oil for future delivery in the same manner that additional demand for contracts for the delivery of a physical barrel today drives up the price for oil on the spot market. As far as the market is concerned, the demand for a barrel of oil that results from the purchase of a futures contract by a speculator is just as real as the demand for a barrel that results from the purchase of a futures contract by a refiner or other user of petroleum.
 
Perhaps 60% of oil prices today pure speculation
 
Goldman Sachs and Morgan Stanley today are the two leading energy trading firms in the United States. Citigroup and JP Morgan Chase are major players and fund numerous hedge funds as well who speculate.
 
In June 2006, oil traded in futures markets at some $60 a barrel and the Senate investigation estimated that some $25 of that was due to pure financial speculation. One analyst estimated in August 2005 that US oil inventory levels suggested WTI crude prices should be around $25 a barrel, and not $60.
 
That would mean today that at least $50 to $60 or more of today’s $115 a barrel price is due to pure hedge fund and financial institution speculation. However, given the unchanged equilibrium in global oil supply and demand over recent months amid the explosive rise in oil futures prices traded on Nymex and ICE exchanges in New York and London it is more likely that as much as 60% of the today oil price is pure speculation. No one knows officially except the tiny handful of energy trading banks in New York and London and they certainly aren’t talking.
 
By purchasing large numbers of futures contracts, and thereby pushing up futures
 
prices to even higher levels than current prices, speculators have provided a financial incentive for oil companies to buy even more oil and place it in storage. A refiner will purchase extra oil today, even if it costs $115 per barrel, if the futures price is even higher.
 
As a result, over the past two years crude oil inventories have been steadily growing, resulting in US crude oil inventories that are now higher than at any time in the previous eight years. The large influx of speculative investment into oil futures has led to a situation where we have both high supplies of crude oil and high crude oil prices.
 
Compelling evidence also suggests that the oft-cited geopolitical, economic, and natural factors do not explain the recent rise in energy prices can be seen in the actual data on crude oil supply and demand. Although demand has significantly increased over the past few years, so have supplies.
 
Over the past couple of years global crude oil production has increased along with the increases in demand; in fact, during this period global supplies have exceeded demand, according to the US Department of Energy. The US Department of Energy’s Energy Information Administration (EIA) recently forecast that in the next few years global surplus production capacity will continue to grow to between 3 and 5 million barrels per day by 2010, thereby “substantially thickening the surplus capacity cushion.”
 
Dollar and oil link
 
A common speculation strategy amid a declining USA economy and a falling US dollar is for speculators and ordinary investment funds desperate for more profitable investments amid the US securitization disaster, to take futures positions selling the dollar “short” and oil “long.”
 
For huge US or EU pension funds or banks desperate to get profits following the collapse in earnings since August 2007 and the US real estate crisis, oil is one of the best ways to get huge speculative gains. The backdrop that supports the current oil price bubble is continued unrest in the Middle East, in Sudan, in Venezuela and Pakistan and firm oil demand in China and most of the world outside the US. Speculators trade on rumor, not fact.
 
In turn, once major oil companies and refiners in North America and EU countries begin to hoard oil, supplies appear even tighter lending background support to present prices.
 
Because the over-the-counter (OTC) and London ICE Futures energy markets are unregulated, there are no precise or reliable figures as to the total dollar value of recent spending on investments in energy commodities, but the estimates are consistently in the range of tens of billions of dollars.
 
The increased speculative interest in commodities is also seen in the increasing popularity of commodity index funds, which are funds whose price is tied to the price of a basket of various commodity futures. Goldman Sachs estimates that pension funds and mutual funds have invested a total of approximately $85 billion in commodity index funds, and that investments in its own index, the Goldman Sachs Commodity Index (GSCI), has tripled over the past few years. Notable is the fact that the US Treasury Secretary, Henry Paulson, is former Chairman of Goldman Sachs.
 
F. William Engdahl is an Associate of the Centre for Research on Globalization (CRG) and author of A Century of War: Anglo-American Oil Politics and the New World Order. He may be contacted at info@engdahl.oilgeopolitics.net
 
 
1 United States Senate Premanent Subcommittee on Investigations, 109th Congress 2nd Session, The Role of Market speculation in Rising Oil and Gas Prices: A Need to Put the Cop Back on the Beat; Staff Report, prepared by the Permanent Subcommittee on Investigations of the Committee on Homeland Security and Governmental Affairs, United States Senate, Washington D.C., June 27, 2006. p. 3.

The president of Opec, the cartel of oil-producing countries, has given warning that the price of crude could hit $200 a barrel, sparking fears that rising fuel costs will force more businesses into bankruptcy. Chakib Khelil, the Algerian Energy Minister and president of Opec, said that the falling value of the US dollar would continue to drive up oil prices as investors sought to store their wealth in other assets. Lehman Brothers, the bank, has said that high prices are being sustained by an influx of money into the oil market from investment funds. It estimates that “hot money” accounts for between $20 to $30 of the recent increase in oil prices and about $40 billion (£20 billion) has been invested in the sector so far this year, equal to all the money pumped into oil last year.  The price of oil hit an all-time high of nearly $120 a barrel today after North Sea production was shut down yesterday because of a strike at the Grangemouth refinery in Scotland. In early trading the price of US light crude rose $1 to $119.93 amid concern about the impact of industrial action at Grangemouth. This came on top of a $2.50 gain on Friday and leaves the price of oil up more than 25 per cent since the start of the year. The price of Brent oil rose 83 cents to $117.17 and oil analysts have predicted that further price rises are likely in the coming months. Supply shortages are expected to get worse over summer, which is hurricane season in the Gulf of Mexico. In addition, demand usually rises in hot months when air-conditioning units are operating at full blast. If financial investors continue to pour money into oil funds, as the president of Opec has suggested, this could cause prices to spike even higher. Today’s price rises came as workers at Grangemouth, which is operated by Ineos, a chemical company, began a two-day walkout yesterday over pension benefits. This forced the closure of the 700,000 barrel-a-day Forties pipeline and sparked fears that Scotland and the North of England could face petrol shortages. Grangemouth supplies 10 per cent of the UK’s petrol but also produces power for BP’s Kinneil plant, which processes the oil from the Forties pipeline. The oil price was also supported by concern over a surge in violence in oil-rich southern Nigeria, which led to five policemen being shot dead on Sunday. Attacks by militia forces forced Royal Dutch Shell and ExxonMobile to shut down oil production temporarily two days ago. Traders were also spooked by continued tensions between the United States and Iran, the world’s fourth-largest oil producer. The rise in oil prices comes despite a 400,000 barrel-a-day reduction in physical demand from the United States, which is consuming less because of its economic slowdown. This has been more than offset by rising financial demand as funds seek alternative investments to the falling US dollar. Analysts fear that the price will rise even higher as supply shortages get worse in the coming months while both physical and financial demand increase.  On the supply side, shortages may occur if there is a bad hurricane season in the Gulf of Mexico and because the oil industry typically saves maintenance work at fields such as the North Sea for good weather. Summer usually brings a rise in demand as air-conditioning use rises, particularly in the Middle East. Rapid economic growth in the region has led to a large increase in energy consumption, which is diverting oil and gas away from export markets to feed domestic needs. This has exacerbated the effect of rising energy demand in the region. The high price of oil is already having an impact on the global economy, with airlines going bust and drivers paying more to fill their cars. Eos, the business-class-only airline, went into Chapter 11 bankruptcy protection yesterday and joins at least six other carriers that have also been grounded in the past two weeks by high costs.

Unions at a major British oil refinery were due to meet management for talks on a planned strike that drove oil prices to a new record on Monday as a farmers’ union said fuel suppliers had imposed rationing. The 200,000 barrels per day Grangemouth refinery in Scotland was cutting production on Monday ahead of a two-day strike due to start on Sunday over pensions cuts. A shutdown at Grangemouth could cut flows of North Sea crude into Britain and hit British gas supplies if the Forties pipeline, which feeds the refinery, is forced to close. “The union is meeting the company later this evening,” a source with the refinery’s union told Reuters by telephone. “The plant is in the process of beginning to shut down.” Ineos was not immediately available for comment on talks. Earlier, refinery owner Ineos’ Communications Manager Richard Longden said it would take a week to fully shut the plant. Worries about a supply disruption at Grangemouth was one of the factors helping push U.S. oil futures to a new record high of $117.76 a barrel on Monday. Oil traders said the effects could be felt first on the diesel market. “It’s more a diesel problem than anything else,” said one London based oil trader. A spokesman for British Prime Minister Gordon Brown said the dispute was a matter for the company and unions to resolve. “There is contingency planning under way,” he said, without giving details. The threat of shortages pushed the price of London ICE gas oil futures, the basis for diesel prices throughout Europe, within a few dollars of their all time record high of $1,079 per tonne. European gasoline hit a record of $1,002 per tonne. In New York, gasoline futures surged to their record high of $3.0040 a gallon and heating oil, the basis for U.S. diesel and heating oil prices, hit its all time peak at $3.3309 a gallon. Workers have threatened to strike over pensions on April 27-28 at the refinery at Grangemouth on the east coast of Scotland, which the plant’s owners said over the weekend would force the facility to close for at least a month. Scotland’s branch of the National Farmer’s Union said its members had reported fuel rationing at a time when spring sowing and lambing meant increased fuel needs, and encouraged its members to conserve fuel. “This is a busy time of year for farmers and we are already hearing reports that some suppliers are unable to fulfill demand for fuel,” Scott Walker, National Farmers Union Scotland policy manager, said in a statement. “Some farmers are only receiving 50 percent of their fuel orders as suppliers restrict deliveries for fear of a shortage in days or weeks to come.” A full shutdown of Grangemouth would force Scottish suppliers to import cargoes from elsewhere in Europe or seek supplies from refiners in northern England. “The petroleum industry has an ability to handle the potential closure of Grangemouth,” said Luke Bosdet, a spokesman for the AA, a British motorists association.

Oil vaulted more than 3% a barrel on Thursday to an all-time peak near $103, eclipsing the previous inflation-adjusted high set 28 years ago, after a fire hit a major European natural gas terminal.  The surge could add pressure on oil cartel OPEC to boost production when it meets in Vienna next week, though members have said they see no shortage of supply in the world market and are unlikely to raise output. U.S. crude surged $2.95 to settle at $102.59 a barrel after hitting $102.97, shattering the inflation-adjusted high of $102.53 reached in 1980, a year after the Iranian revolution. London Brent crude gained $2.63 at $100.90 a barrel after the European benchmark hit a record $101.24. “Speculators own this market, and they are pushing it up as they see fit,” said Stephen Schork, editor of energy newsletter the Schork Report. The gains come amid a broad-based commodities rally fueled in part by expectations the U.S. Federal Reserve will continue to aggressively cut interest rates to battle an economic slowdown in the world’s biggest energy consumer, speeding up the rate of inflation. “The energy complex is a dollar/inflation story as investors have moved into commodities as a hedge against inflation,” said Nauman Barakat, senior vice president at Macquarie Futures USA.

The price of crude oil fell slightly on Thursday as concerns continued that the US economy is teetering on the brink of recession, hurting demand. Also possibly hurting demand is growing joblessness in the US, where new unemployment claims were up by 69,000 to 375,000 last week, much more of a gain than had been anticipated. Gasoline demand in the United States was reported to be at its lowest in two years last week. March contracts for West Texas Intermediate Crude was 58 cents lower to $91.75 per barrel just before the close of floor trade on the New York Mercantile Exchange, while Brent crude for March delivery dropped 46 cents to $92.07 per barrel on the ICE Futures Europe exchange in London. Nymex March gasoline was down 5 cents to $2.33 per gallon and March heating oil fell 1 cent to $2.53 per gallon but March natural gas added 3 cents to $8.07 per million British thermal units. Statements from various members of the Organization of Petroleum Exporting Countries ahead of tomorrow’s meeting in Vienna suggest that OPEC will hold production quotas steady this month. The cartel’s president said that neither raising nor cutting quotas would help the global economy, but some members are speculating that quotas could be cut in March if oil prices keep dropping as the group continues to say that current prices are the fault of speculators, and not due to any supply deficiencies.

Oil futures dropped sharply Tuesday on mounting concerns that the U.S. economy may be heading toward a recession that would dampen demand for crude. While the Federal Reserve’s interest rate cut helped crude futures recover some of their earlier losses, many investors doubt the move will stave off a serious slowdown. High energy prices also have been cited as a force pushing the economy toward recession. If oil prices continue to fall, as many analysts now expect, that could relieve some pressure on the economy. In London, Brent crude futures for March delivery fell 4 cents to $87.47 a barrel on the ICE Futures exchange.

Oil has traded at $100 a barrel for the first time, with violence in Nigeria, Algeria and Pakistan, the weak US dollar and the threat of cold weather have all raised prices after the new year break. Light sweet crude rose $4.02 to $100 a barrel in New York, prompting a drop in shares and a surge in gold prices. There are concerns that the high price of oil will stoke inflation at a time when many central banks are trying to cut interest rates to stimulate growth. US shares had already been hit on Wednesday by figures showing that the manufacturing sector was contracting. While daily price rises have been blamed on unrest in oil-supplying countries such as Nigeria, an underlying and significant factor has been an increase in demand from China and India. “$100 is just the beginning,” said Zachary Oxman, senior trader at Wisdom Financial in California.

January Brent crude dipped to US$88.28 a barrel on the ICE Futures exchange in London. Crude oil futures have gone back by over 10% from their all-time highs of near-US$100 in November. This dip has been fuelled partly by the belief that slower growth in USA- the world’s largest economy will cut into demand growth for oil; and secondly- oil and petroleum product supplies are not perceived to be insufficient for the Northern Hemisphere’s winter. The report Friday showed U.S. employers added 94,000 jobs to their payrolls in November, crushing hopes of some oil investors that the Federal Reserve will cut interest rates by a half percentage point instead of the more widely expected quarter-point when it meets Tuesday. The larger interest rate cut would add to the dollar’s weakness against other currencies and provide stronger support to oil prices. Oil offers a hedge against a weak dollar and is more attractive to foreign investors when the dollar is falling.

Oil retreated on Wednesday after earlier closing in on the $100 milestone in response to a new slump in the dollar. U.S. light crude surged to a record $99.29 early in the session but then edged off this peak to stand at $97.53, down 50 cents, at 4:23 p.m. London Brent crude was down 24 cents at $95.25. U.S. crude oil inventories fell by a surprise 1.1 million barrels last week, according to data from the U.S. Energy Information Administration. Analysts had predicted a rise of 600,000 barrels. But crude stocks rose at the key U.S. delivery point at Cushing, Oklahoma, which helped to depress prices. Distillates, which include heating oil, fell by 2.4 million barrels, a much bigger drop than the 300,000 barrel decrease that had been forecast. “The crude draw is bullish, however the market will be rangebound due to people being out for the holiday,” said Dan Flynn, analyst at Alaron Trading, referring to the U.S. Thanksgiving holiday starting on Thursday. Oil is up by about 45 percent since mid-August, driven by increased speculative investment, tighter supplies and a slide in the dollar. The dollar’s fall to record lows against the euro has spurred buying of relatively cheap dollar-denominated commodities. The dollar sank to a new record low against the euro and versus a basket of currencies on Wednesday after the U.S. Federal Reserve cut its growth outlook for next year, boosting chances of another interest rate cut in December. Worries about a U.S. slowdown helped trigger sharp falls on Wall Street, with the Dow Jones industrial average down more than one percent. High oil prices could intensify pressures on the fragile U.S. economy, which could ultimately hurt demand for oil. The rising cost of oil, for example, could force more than three-quarters of Americans to tighten their budgets by cutting fuel use or by slashing spending elsewhere, according to a Reuters/Zogby poll. Some 32.5 percent of people surveyed said they would drive less if oil prices kept rising, while 20.8 percent said they would try to conserve energy at home and 22.8 percent said they would cut spending on retail and entertainment. Gold and platinum have also rallied in response to the falling dollar, although copper and zinc have slumped to multi-month lows on concerns the U.S. mortgage crisis could slow economic growth and demand. U.S. Energy Secretary Sam Bodman has said producers need to pump more to bring prices down from levels that are close to a record in nominal and inflation-adjusted terms. But the Organization of the Petroleum Exporting Countries, which meets on December 5 in Abu Dhabi to chart supply policy, has said the market is well-supplied and it is up to consumer countries to curb speculation through regulation.