Oil higher for 2nd day, still buoyed by Fed

Sunday, September 16, 2012    

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Oil rose for a second day on the back of the Federal Reserve's aggressive plan to boost the US economy. More gains are expected, but that might not translate into a spike in prices at the gas station.

After earlier topping US$100 for the first time since May, benchmark oil was up 72 cents to US$99.03 per barrel in midday trading in New York.

Analysts say the Fed's plan to keep interest rates at extraordinarily low rates into 2015 gives investors the incentive to put their money into riskier assets like stocks and commodities. The expectation that the Fed's moves will help the economy should also boost oil prices because demand for energy should pick up.

But the higher oil and other commodities rise, the greater the chance they'll curtail consumer spending in an economy where unemployment is stuck above 8 per cent. That's why analysts think the gains should be limited.

"Higher commodity prices are going to put a dent in spending as they give consumers pause when they're spending more at the (grocery) store or the gas pump," said Andrew Lipow of Lipow Oil Associates in Houston.

An increase in the price of oil usually means a rise in pump prices. But fundamentals favor a decline in the price of gasoline, said Tom Kloza, chief oil analyst at Oil Price Information Service. The end of summer driving season means less demand for gas. And refiners are about to switch to making winter blends, which are cheaper than summer blends formulated to cut down on pollutants.

Kloza thinks gas might rise a penny or two from its current average of US$3.87 per gallon, but should decline during the period between late September and Thanksgiving. He sees gasoline falling to between US$3.50 and US$3.75 per gallon in October.

The wild card for oil is the unfolding unrest in the oil-rich Middle East. Protesters angry over an anti-Muslim film ridiculing the Prophet Muhammad began assaulting a string of US embassies in the region four days ago.

Brent crude, which is used to price a number of international types of oil, rose 74 cents to US$116.62 in London. Kloza said an escalation in the Middle East situation could push Brent up as high as US$125 per barrel and the US benchmark as high as US$120. That would limit the decline in gasoline prices, he said.



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