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Oil price surpasses US$103 per barrel

Oil prices surpassed US$103 a barrel for the first time yesterday as persistent weakness in the US dollar and the prospect of lower interest rates attracted fresh money to the oil market.

Prices were supported by comments on Thursday from Federal Reserve Chairman Ben Bernanke, who said the US economy is not immediately threatened with stagflation, a combination of economic weakness and rising inflation.

Investors chose to see the comments as confirmation of their beliefs that the Fed will continue cutting interest rates to try to shore up the economy.

Lower US interest rates tends to weaken the dollar, and crude futures offer a hedge against a falling dollar.

"Due to the weakening dollar and the rising fear of inflation, investors have put money into commodities, oil included," said Victor Shum, an energy analyst with Purvin & Gertz in Singapore.

"Commodities, as tangible assets, do not face as much inflationary threat as opposed to holding a currency," Shum said. "Even though the value of money is changing, the asset continues to have an intrinsic value."

Light, sweet crude for April delivery jumped to a new trading record of US$103.05 a barrel in Asian electronic trading on the New York Mercantile Exchange before slipping back to US$102.79 a barrel, up US$0.20, midafternoon in Singapore.

On Thursday, the contract jumped US$2.95 to settle at a record US$102.59 a barrel.

Shum warned that a price bubble was emerging in the crude futures market as investors ignored market fundamentals that have shown continuous increases in US crude supply while several recent forecasters have lowered oil demand growth predictions for this year due to the slowing economy.

"We've seen seven straight weeks of builds in crude oil inventories. The oil market fundamentals are softening and yet we see record highs being set, day in and day out," Shum said.

Shum warned of the possibility of a sharp correction at some point, though unlikely in the near term.

"Right now, there's a lot of trading based on emotion -- emotions are high and that could keep crude oil at elevated levels, but the market faces the risk of a price collapse."

The Japanese government on yesterday urged the oil cartel OPEC to increase output to help ease record prices.

"The high crude prices are gradually damaging the global economy. This will damage the economies of oil-producing countries," Minister of Economy, Trade and Industry Akira Amari said.

The OPEC holds its next policy meeting on Wednesday.
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