Oil prices gain steam after brief respite

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NEW YORK (CNNMoney.com) -- Oil prices settled higher on Tuesday after a momentary dip following the Federal Reserve's announcement that it would cut a key interest rate by three-quarters of a percentage point rather than the full point that many investors had been hoping for.

Light, sweet crude for April delivery settled up $3.74 to $109.42 a barrel, more than a dollar higher than the $108.34 a barrel that oil was fetching just prior to the Fed news Tuesday afternoon.

Immediately following the Fed announcement, oil prices drifted off their highs and were up only $1.84 to $107.52 a barrel. Some analysts speculated that investors initially sold off crude because they priced in a whole percentage point cut rather than the Fed's three-quarters of a percentage point cut.

"I can't imagine that people were disappointed by a three-quarters cut," said Stephen Schork, publisher of industry newsletter the Schork Report. "This was just 'buy the rumor sell the fact.'"

Within minutes after the initial drift, traders resumed buying with force, sending oil up to nearly $110 a barrel, closing in on the prior settlement record of $110.33 set just five days ago. The late surge indicates that there is still more upside coming.

The Fed announcement came less than an hour before oil settled for the day.

"We just ran out of time," Schork added.

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 countries to increase output, or for foreign consumers to cut back on oil use.

"These prices are absurd, but this is the market," said Schork. "Even after an historic selloff yesterday, tomorrow it would not be surprising if we opened around $111."

Oil prices settled above $100 a barrel for the first time on Feb. 26, and they have set record intraday highs in 14 of the past 16 trading sessions. Oil has not traded below $100 a barrel since March 5.

Oil prices have risen more than five-fold since 2002 and about 10% already in 2008. Most analysts blame rising demand and tight supply. That has also attracted floods of investment money, and exaggerated the effects of supply disruptions.