Further weakening of dollar going forward will keep the oil prices high when markets buy the commodities to hedge against inflation.

Oil Trades Above $102 After Reaching Record as Dollar Drops
2008-02-28 18:46 (New York)

By Mark Shenk
Feb. 29 (Bloomberg) -- Crude oil was little changed above
$102 a barrel after reaching a record as the U.S. dollar dropped
to an all-time low against the euro, extending a three-day rout
and prompting investors to buy commodities as an inflation hedge.

Declines in equities and the dollar after the U.S. economy
grew less than economists forecast in the fourth quarter fanned
speculation interest rates will fall, stoking inflation.
Increased investor demand for oil coincided with reports of a
drop in Nigerian production, disruption of shipments from Iraq
and a fire at a U.K. gas terminal.

``All the crude oil available is being vacuumed up by
investors, in part because interest rates are low and there's no
alternative to commodities that looks very good,'' said Tim Evans,
an energy analyst at Citigroup Global Markets Inc. in New York.
``The fall in the dollar also attracted funds.''

Crude oil for April delivery was trading 14 cents lower at
$102.45 a barrel on the New York Mercantile Exchange at 10:22 a.m.
in Sydney. Yesterday, futures rose $2.95, or 3 percent, to settle
at $102.59 a barrel, a record close. Futures earlier rose to
$102.97 a barrel, the highest since trading began in 1983.

Firefighters doused the blaze at Royal Dutch Shell Plc's
Bacton terminal in the U.K., which handles natural gas flowing
from the North Sea into Europe's biggest gas-consuming country. A
fire erupted in the water-treatment plant at the terminal, the
Norfolk Fire Service press office said yesterday.

Brent crude for April settlement yesterday rose $2.63, or
2.7 percent, to $100.90 a barrel on London's ICE Futures Europe
exchange. Futures reached $101.10 a barrel, the highest since
trading began in 1988.

``Inventories are still too low so if there's a problem
anywhere in the system we are susceptible to upside price
moves,'' said Adam Sieminski, Deutsche Bank's chief energy
economist in New York.

Nigerian Disruption

Eni SpA said there was a ``small'' disruption to its Brass
River crude-oil production in Nigeria, denying there was a
militant attack that cut output. Four traders of West African
crude oil said yesterday that output was cut following an attack.
Production was reduced by 50,000 barrels a day to around 120,000
barrels a day, one of the traders said.

The flow of oil from northern Iraq may be interrupted until
later today because of a pumping station fault, Reuters reported.

``There's been news from high-risk areas, which the market
has to take seriously,'' said Brad Samples, a commodity analyst
for Summit Energy Inc. in Louisville, Kentucky. ``During the
first month of the year, the focus moved to demand and what
impact the U.S. economic slowdown would have. Supply worries took
a back seat, which is rare.''

Commodity Rally

The UBS Bloomberg Constant Maturity Commodity Index gained
as much as 1.7 percent to 1506.707 yesterday, the highest ever.
Gold, platinum, wheat and soybeans have all been pushed to
records this month.

``Part of what we are seeing is a move to commodities
because the returns have been better than with equities and
bonds,'' Sieminski said.

The U.S. currency traded at $1.52 per euro at 6:53 a.m. in
Tokyo, after touching $1.5229 yesterday, the weakest since the
euro began trading at about $1.17 in January 1999.

``The size of the crude-oil market is still relatively small
compared to the currency, bond or stock markets, so it doesn't
take much of a reallocation of funds to have a major impact,''
Evans said.

Fear is driving the rally in oil prices and OPEC could bring
down prices with an oil release, said U.S. Energy Secretary
Samuel Bodman. The Organization of Petroleum Exporting Countries
should take steps to cut prices for its own good, he told
reporters yesterday in Washington.

`Fear Level'

``The price that we are now seeing would indicate a certain
fear level on the part of the marketplace,'' Bodman said. ``It is
important that the members of OPEC for their own sake carefully
look at supply and demand.''

Ministers from the 13 members of OPEC are scheduled to meet
in Vienna on March 5 to discuss oil quotas. OPEC produces more
than 40 percent of the world's crude oil.

``I expect OPEC to leave output unchanged,'' Shokri Ghanem,
chairman of Libya's National Oil Corp., said by phone from
Tripoli. ``At this point, there is no reason to do anything.''

Oil extended gains after an Energy Department report showed
that U.S. supplies of natural gas, a competing fuel, fell more
than average for this time of year. Inventories declined 151
billion cubic feet to 1.619 trillion cubic feet last week. The
average change for this time of year is a decline of 141 billion
cubic feet, according to department data.

Cold weather in the northern U.S. has bolstered consumption
of natural gas and heating oil, the two most-used heating fuels.

Natural gas for April delivery yesterday rose 38.3 cents, or
4.2 percent, to $9.443 per million British thermal units in New
York. Futures touched $9.498, the highest since Feb. 1, 2006.

Heating oil for March delivery gained 7.45 cents, or 2.7
percent, to $2.8456 a gallon in New York, the highest closing
price since trading began in 1978. Futures reached $2.8562, a
record intraday price.

--With reporting by Daniel Whitten in Washington, Alexander
Kwiatkowski in London, Reg Curren in Calgary and Fred Pals in
Amsterdam and Margot Habiby in Dallas. Editors: Clyde Russell,
John Viljoen.

To contact the reporter on this story:
Mark Shenk in New York at +1-212-617-4331 or
mshenk1@bloomberg.net.

To contact the editor responsible for this story:
Reinie Booysen at +65-6212-1154 or
rbooysen@bloomberg.net.