Oil jumps $4 on Fed, supplies

Hits new record of over $94 dollars a barrel as crude stocks fall and interest rates decline.

By Steve Hargreaves, CNNMoney.com staff writer

NEW YORK (CNNMoney.com) -- Oil prices set a new record high Wednesday, jumping over $4 on an expected interest rate cut from the Federal Reserve and dwindling supplies in the United States.

U.S. light crude for December delivery jumped $4.15 to settle at a new record of $94.53 a barrel on the New York Mercantile Exchange, topping Monday's record close of $93.80 a barrel. Prices rose as high as $94.74 in intraday trade, surpassing crude's all-time record trading high of $93.80 a barrel, also set Monday.

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Oil prices jumped over $4 Wednesday, setting a new record.

The Fed cut its key funds rate by a quarter percentage point Wednesday. The move, which will affect the amount both consumers and business have to pay to borrow money, was expected and traders said most of the quarter point cut was already priced into oil.

Oil prices initially retreated to trade below $94 a barrel just after the late-day interest rate news.

"The market had been rallying in anticipation of this, and the actual news didn't have much of an effect," said Andy Lebow, an energy broker at MF Global in New York.

An interest rate cut boosts oil prices because it is meant to spur economic activity, which would drive up demand for oil.

A rate cut also pushes down the dollar, in which oil is priced. A falling dollar makes oil cheaper for foreign consumers and means oil producing countries have less incentive to raise production, both of which are bullish for oil prices.

It seems likely prices reached a record high earlier in the session on speculation the Fed would cut rates by more than they did.

But nonetheless, oil prices bounced back by the end of the session.

Lebow said the big drop in crude supplies was the main factor driving prices Wednesday.

Earlier this morning, the Energy Information Administration said crude stocks fell by 3.9 million barrels last week. Analysts were looking for a gain of 100,000 barrels, according to a Dow Jones poll.

The drop in crude stocks came at the same time that refiners scaled back operations, running at just over 86 percent capacity.

Distillates, used to make heating oil and diesel fuel, rose by 800,000 barrels, while gasoline supplies increased by 1.3 million barrels. Analysts were looking for a 1 million barrel drop in distillate supplies and a 400,000 barrel gain in gasoline stockpiles.

One trader said he was surprised the distillate number actually rose, but said one cold snap could send distillate, and hence heating fuel prices, soaring.

"Refining capacity numbers are very low," Ray Carbone, a broker and trader at Paramount Options, said from the NYMEX floor. "The potential for an explosion is there."

Oil prices got a boost in premarket trade Wednesday after a report said the U.S. economy grew by a robust 3.9 percent rate in the third quarter, which was more than expected.

Oil prices sold off by more than $3 a barrel Tuesday after a report from influential trading house Goldman Sachs urged investors to sell oil now in order to lock in profits.

But crude is still near all-time highs, even adjusted for inflation. The last time oil was this high was the early 1980s, when it rose to $93 to $101 a barrel, depending on the inflation calculation used and the oil contract cited.

Crude prices have spiked nearly 20 percent in the last three weeks, an oddity for the time of year knows as a "shoulder season" - a time of slack demand between the summer driving and winter heating months.

Fighting between Turkey and the Kurds in oil-rich northern Iraq, reports showing demand outpacing supply in the fourth quarter, a falling dollar and speculative investing have all been cited as reasons for the runup.

Crude oil prices have surged nearly five-fold since trading below $20 a barrel in 2002. Analysts say surging global demand combined with limited new supply is the main underlying factor.

The surge in prices has also attracted lots of speculative investment money, further driving prices higher.

And the tight supply and demand situation magnifies the effect that geopolitical tensions have on prices, as there is less spare supply available globally to cover disruptions from places like Iran, Nigeria or Venezuela.

The falling U.S. dollar has also played a role, as oil worldwide is priced in dollars.

Oil-producing nations have less incentive to ramp up output if the buying power they receive per barrel is declining, and foreign consumers have less incentive to reduce demand if oil is, relatively, getting cheaper for them.  Top of page

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Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer.

Morningstar: © 2014 Morningstar, Inc. All Rights Reserved.

Factset: FactSet Research Systems Inc. 2014. All rights reserved.

Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved.

Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor’s Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2014 and/or its affiliates.