Oil prices punch through $94 US a barrel

Energy futures surged Wednesday to a new record above $94 US a barrel after the U.S. government reported an unexpected drop in crude oil inventories for the second week in a row.

Oil futures surged Wednesday to a new record, nearly $95 US a barrel, after the U.S. government reported an unexpected drop in crude oil inventories for the second week in a row and the U.S. Federal Reserve cut interest rates by a quarter point.

Interest rate cuts generally support oil prices because they tend to send the U.S. dollar downward; the dollar is already at multiple-decade lows against major currencies, including the Canadian dollar. Oil futures have been driven to record levels in recent months partly because they offer a hedge against a weakdollar.

However, many stock and bond investors were disappointed by the Federal Reserve, which also warned that further interest rate cuts weren't assured because of the risks of inflation — which are being driven in part by higher energy prices. That did not seem to dampen oil trading, however, probably because of the greater impact of Wednesday's inventory report.

In its weekly inventory report, the U.S. Energy Department's Energy Information Administration said oil supplies fell by 3.9 million barrels last week. Analysts surveyed by Dow Jones Newswires, on average, had expected an increase of 100,000 barrels.

Much of that decline was due to a big drop in crude supplies at a closely-watched oil terminal in the Midwest.

"The market is clearly reacting to the larger than expected 3.9 million barrel drop in crude oil inventories, including a stunning 3.1 million barrel drop at the Cushing, Okla., delivery point for the Nymex (crude) futures," wrote Tim Evans, an analyst at Citigroup Inc. in New York, in a research note.

Cushing supplies have been under pressure in recent months due to differences in the price between front-month oil contracts and those for delivery in future months. This price difference, or spread, has given storage tank owners a financial incentive to sell their oil, rather than hold it in inventory. Analysts have also blamed falling Cushing supplies, in part, for the rally in which oil prices have jumped 35 per cent since August.

"It's all about Cushing," said Jim Ritterbusch, president of Ritterbusch and Associates in Galena, Ill. "That's going to just keep ... investment capital roaring into this market."

Light, sweet crude for December delivery rose $4.15 to $94.53 US a barrel on the New York Mercantile Exchange after rising as high as $94.74, a new trading record. Crude prices are near inflation-adjusted highs hit in early 1980. Depending on how the adjustment is calculated, $38 US a barrel then would be worth $96 to $101 US or more today.