Oil prices jumped to a new record above US$106 on Friday but settled lower, extending their recent pattern of choppy trading after a weak jobs report convinced many traders that the US Federal Reserve's interest rate cutting campaign will continue.
Employers cut 63,000 jobs in February, the biggest drop in five years, the Labor Department said. Investors can react to such news in one of two ways: by selling on the prospect that the economy, and demand for oil, is cooling, or by buying on a conviction that bad economic data makes it more likely the Fed will cut rates.
On Friday, investors engaged in a little of both, sending oil prices down more than US$1 at one moment, and propelling them to new records the next.
"The higher the market goes, the more volatile it becomes," said Darin Newsom, senior analyst at DTN in Omaha, Nebraska. "Does it mean that the rally is over? No."
Light, sweet crude for April delivery fell US$0.32 to settle at US$105.15 a barrel on the New York Mercantile Exchange. But prices fluctuated widely, setting a new trading record of US$106.54 and falling as low as US$103.91.
Lower interest rates tend to weaken the dollar, and many analysts believe the weak dollar is the reason why oil set new inflation-adjusted records four times this week, and has risen 23 percent in less than a month.
Crude futures offer a hedge against a falling dollar, and oil futures bought and sold in dollars are more attractive to foreign investors when the dollar is falling. On Friday, the dollar set a new low against the euro before rising. But most investors believe that despite occasional rebounds, the dollar is likely to continue falling as the Fed continues to cut rates.
"The swings in the dollar are still the most critical item," said Jim Ritterbusch, president of Ritterbusch and Associates, an energy consultancy in Galena, Illinois.
Concerns about a possible conflict between oil producers Colombia and Venezuela also supported oil prices on Friday. Earlier this week, rebels attacked and shut down a Colombian oil pipeline that transports 60,000 barrels of oil a day in retaliation for a Colombian raid into Ecuador.
Venezuela threatened to slash trade and nationalize Colombian-owned businesses, and Venezuela and Ecuador have sent troops to their borders with Colombia.
Many analysts believe oil is overvalued, arguing that oil supplies are at high levels and the demand is falling. In its latest inventory report, the US Energy Department said overall demand for oil dropped 3.4 percent over the last four weeks compared to the same period last year.
"We don't see oil demand accelerating while the price has its foot on the throat of consumers," said Tim Evans, an analyst at Citigroup Inc, in a research note.
But while analysts expect oil's underlying supply and demand fundamentals to eventually pull down its price, few are willing to predict when that will happen. Meanwhile, oil could continue rising to as high as US$120 in the short term, according to some forecasts.
Widely watched oil price prognosticator Goldman Sachs said oil could average US$110 a barrel by 2010, up from a previous forecast of US$80, and said a price spike as high as US$200 a barrel is possible, according to Dow Jones Newswires.
In London, April Brent crude fell US$0.23 to settle at US$102.38 a barrel on the ICE Futures.
Also see: Coal The end is nigh
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