Oil oozes higher after rate cut

Special Reportfull coverage

Oil rises on surprise inventory drop Exxon's drilling juggernaut Oil climbs above $74 Oil pares gains, settles lower Oil rises on weaker dollar Oil dips near $72 on stronger dollar

Video

More video

President Bush calls on OPEC to increase oil supply, saying high prices hurt the world economy. Play video

NEW YORK (CNNMoney.com) -- Oil prices rose after seesawing Wednesday as traders tried to balance rising inventories with the Federal Reserve's half-percentage point rate cut.

U.S. light crude for February delivery settled at $92.33 a barrel, up 69 cents from Tuesday's closing price of $91.64 a barrel on the New York Mercantile Exchange.

Prices fell initially after the government inventory report, which showed a big increase in gasoline and crude supplies.

In its weekly inventory report, the Energy Information Administration said crude stocks rose by 3.6 million barrels last week. Analysts were looking for an increase of 2.3 million barrels, according to a Dow Jones poll.

Gasoline supplies rose by 3.6 million barrels, more than twice what analysts had expected.

The rise in crude supplies, however, was offset by an unexpected decline in distillate stockpiles and high gas demand.

Distillates, which are used to make heating oil and diesel fuel, fell by 1.5 million barrels. Analysts were looking for a 1.6 million barrel gain.

Refinery usage was also low, at 85 percent, and gasoline demand over the last four weeks averaged 1.4 percent, higher than usual when compared to the last several months.

While oil prices initially fell after the report was released, anticipation for another Fed rate cut stemmed the slide.

The central bank is expected to slash interest rates by as much as 50 basis points, or half of a percentage point, this afternoon.

One trader warned that the market needs to see at least a 50 basis point cut to prevent a free fall in oil prices.

"If we do a quarter-point (cut), we tank," said Phil Flynn, senior market analyst at Alaron Trading in Chicago. "This market needs to be fed."

An interest rate cut usually sends the dollar lower - and oil prices higher - as investors sell dollar-denominated securities and buy commodities as a hedge.

Also, oil is priced in dollars worldwide, so a falling dollar provides less incentive for oil-exporting counties to increase output, or for foreign consumers to cut back on oil use.

Production problems in Canada, along with colder weather, which raises demand for heating oil in the U.S., also helped keep oil prices afloat.

The Associated Press reported that 315,000 barrels of crude a day at a Canadian oil sands field has been temporarily stopped due to freezing temperatures.

Dow Jones Newswires reported that operations at the Syncrude Canada field will not resume for several days. Canada is the single largest supplier of crude oil to the U.S.

Traders are also watching OPEC, which is set to meet at the end of the week. The oil cartel is not expected to increase production despite high prices that many say are hindering economic growth.

The cartel maintains that current high prices are the result of refining bottlenecks and speculative investing - not a lack of crude.

Flynn said OPEC is even considering a production cut, as they fear a faltering U.S. economy could leave the market flooded with crude and lead to a price collapse.

Oil prices topped $100 a barrel early this year, but have since pulled back amid fears of a recession in the U.S., the world's largest economy.

Oil prices have risen nearly five-fold since 2002. Most analysts blame rising demand and tight supply. That has also attracted floods of investment money, and exaggerated the effects of supply disruptions.