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Oil hits record 2 days straight

Crude closes over $81 a barrel after Fed lowers key interest rate, sparking hopes of further economic growth and fears the dollar will fall.

NEW YORK ( -- Oil prices hit another high Tuesday, closing at more than $81 a barrel after the Federal Reserve lowered a key interest rate.

U.S. crude for October delivery rose 94 cents to settle at $81.51 a barrel on the New York Mercantile Exchange, another record. Oil also hit another trading high of $81.90 a barrel earlier in the session.

Although oil is at a record high in nominal terms, adjusted for inflation it remains below its peak of more than $90 a barrel in the early 1980s.

The Federal Reserve cut the target on a key short-term interest rate by a half of a percentage point Tuesday to 4.75 percent. Oil traders took the move as a sign the cut could spur economic growth, increasing the demand for crude.

Investors had already priced a quarter-point cut in the benchmark federal funds rate into the market, said Brad Samples, a commodities analyst at Summit Energy Services Inc. in Louisville, Ky. The half-point cut spurred even more buying.

Moreover, many analysts see a weaker dollar as a natural side effect of lower rates, and that could promote buying of oil contracts by foreign investors.

"Lower interest rates have the unintended consequence of raising oil prices if the dollar declines relative to other currencies," Larry Chorn, chief economist at Platts, the energy research arm of McGraw-Hill Cos, told the Associated Press in a statement.

"Seen through a euro or yen prism, nominal (New York Mercantile Exchange crude) prices have yet to reach their 2006 highs," said Antoine Halff, head of energy research at Fimat USA LLC, in a research note.

Prices also rose as investors looked ahead to Wednesday's inventory report by the Energy Department's Energy Information Administration, which is expected to show that inventories and refinery activity declined last week.

A bomb attack on a pipeline near the northern Iraqi city of Beiji on Tuesday, which caused crude oil to spill into the Tigris River, contributed to Tuesday's advance.

In other Nymex trading, October gasoline rose 1.61 cents to settle at $2.0603 a gallon on the Nymex, while heating oil futures rose 1.36 cents to settle at $2.2423 a gallon.

October natural gas fell 8.5 cents to settle at $6.568 per 1,000 cubic feet. Natural gas prices have been volatile in recent days as tropical weather threats to critical gas and oil infrastructure in the Gulf of Mexico have grown and subsided.

On Tuesday, the National Hurricane Center was watching two storm systems, one just east of Florida and the other in the central Atlantic. Futures pared earlier losses after updated forecasts said the Florida system could develop in strength over the next couple of days.

At the pump, meanwhile, gas prices slipped 0.1 cent overnight to a national average of $2.787 a gallon, according to AAA and the Oil Price Information Service. Retail prices, which typically lag the futures market, peaked at $3.227 a gallon in late May.

Early in the year, gas prices led the energy complex higher as an unusual number of refinery outages kept supplies low. With the end of the summer driving season, energy investors have been far less focused on gasoline inventories and refinery activity than they once were.

In its Wednesday report, analysts surveyed by Dow Jones Newswires expect the EIA to show that crude inventories fell by 1.5 million barrels, on average, in the week ended Sept. 14, while gasoline supplies fell by 1.3 million barrels.

Refinery utilization likely fell by 0.5 percentage point to 90 percent of capacity, the analysts forecast, and distillate inventories, which include heating oil and diesel fuel, likely rose by 1.1 million barrels.

Crude oil's recent rise into record territory has been driven in part by a belief that supplies are not keeping pace with robust global demand. Last week, for instance, prices rose despite OPEC's decision to boost production by 500,000 barrels a day this fall. Many analysts and investors saw that increase as too little.

On Tuesday, oil prices drew additional support from new comments by Organization of Petroleum Exporting Countries officials who suggested that the oil cartel won't increase production to push oil prices back down below $80 a barrel.

"OPEC has done what it can," Abdullah bin Hamad Al Attiyah, Qatar's oil minister, told the AP. "I see no need for additional oil supply that the market won't absorb."

-from staff and wire reports Top of page