Oil jumps as investors pour money back into commodities amid interest rate talk

Fri, Apr 4 2008, 15:46 GMT
http://www.afxnews.com

LONDON (Thomson Financial) - Oil jumped as investors poured money back into commodities on expectations of an interest rate cut in the United States and in hope that raw materials will provide them with a useful hedge against wider market weakness.

Such weakness was confirmed earlier today in poor U.S. data, which reignited fears of a recession and sparked talk of another interest rate cut.

Data out earlier from the Labor Department showed the U.S. economy has shed jobs for three consecutive months, losing 80,000 non-farm jobs in March, compared to an expected 50,000 job-loss forecast by analysts.

The data also showed unemployment rose to its highest level in two and a half years the same month.

"The big news of the day so far has been the US employment report," said Citigroup analyst Tim Evans. "The loss of 80,000 jobs during March (is) seen as reinforcing the recession theme, with lower interest rates and a weaker dollar expected to push oil prices higher," he added.

Such expectations for the dollar and interest rates have also helped boost industrial and precious metals prices, which had been lower ahead of the data.

At 4:24 p.m., New York's West Texas Intermediate crude for May delivery was up $1.16 at $104.99 a barrel.

Brent crude for May delivery was up 80 cents at $103.32 a barrel.

Analysts at Capital Economics said the US payrolls data basically confirms that the world's largest economy is in recession, noting that the rate of decline in private payrolls this year has never been seen outside a recession.

Oil prices have not headed lower in response, as players choose to set aside for now longer-term fears that oil demand will decline as US economic growth withers.

MF Global analyst Ed Meir said that over the longer term, he believes the outlook for oil prices is increasingly cloudy, especially if the current U.S. slowdown starts spreading further into Europe, Japan and then on to Asia.

According to data released Wednesday by the U.S. Energy Information Administration, demand for crude oil products fell an annual 1.3 percent over the last four weeks, while crude stocks surged 7.4 million barrels last week.

On the other hand, however, the data also showed gasoline stocks declined by a much larger than expected 4.5 million barrels last week. Traders chose to focus on this figure rather than on falling demand or rising crude stocks.

As a result, oil prices rose sharply on Wednesday, but have since retraced some of those gains.

"The truth is that demand for oil overall is weakening. Yet whether or not demand matters right now is still the debate," noted Alaron Trading trader Phil Flynn.