AP
Oil Falls After Setting New Record
Friday March 7, 4:39 pm ET
By John Wilen, AP Business Writer
Oil Prices End Lower After Hitting New Record Above $106 on Interest Rate Expectations


NEW YORK (AP) -- Oil prices jumped to a new record above $106 Friday but settled lower, extending their recent pattern of choppy trading after a weak jobs report convinced many traders that the 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 a dollar 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, Neb. "Does it mean that the rally is over? No."

Light, sweet crude for April delivery fell 32 cents to settle at $105.15 a barrel on the New York Mercantile Exchange. But prices fluctuated widely, setting a new trading record of $106.54 and falling as low as $103.91.

At the pump, meanwhile, gas prices extended their march toward new records, rising 0.4 cent to a national average of $3.189 a gallon, according to AAA and the Oil Price Information Service. Gas prices are 68 cents higher than a year ago, and within a nickel of last May's record price of $3.227 a gallon. Many analysts expect prices to jump much higher as driving demand picks up in the spring.

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 Friday 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, Ill.

Concerns about a possible conflict between oil producers Venezuela and Colombia also supported oil prices Friday. Earlier this week, rebels attacked and shut down a 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 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 $120 in the short term, according to some forecasts.

Goldman Sachs, a widely watched oil price prognosticator, said oil could average $110 a barrel by 2010, up from a previous forecast of $80, and said a price spike as high as $200 a barrel is possible, according to Dow Jones Newswires.

Other energy futures were mixed Friday. April gasoline futures rose 4.11 cents to settle at $2.6943 a gallon, while April heating oil futures fell 2.63 cents to settle at $2.947 a gallon after earlier hitting a new trading record of $2.9863 a gallon.

April natural gas futures rose 2.7 cents to settle at $9.769 per 1,000 cubic feet.

In London, April Brent crude fell 23 cents to settle at $102.38 a barrel on the ICE Futures exchange.

Associated Press writers Pablo Gorondi in Budapest and Gillian Wong in Singapore contributed to this report.