Weak dollar pushes energy prices higher

The Associated Press
Friday August 28, 2009

LONDON -- The effect of the weak dollar is again pushing oil prices higher in the face of little demand for energy and huge surpluses of crude.

On Friday, the dollar again fell against major currencies.

Since March, the dollar index, which weighs the U.S. currency against a basket of foreign currencies like the euro, the Japanese yen, the pound and the Swiss franc, has fallen nearly 12 percent. In that same period, crude has jumped 81 percent.

The widening gap between the value of a dollar and that of a barrel of oil shows just how much oil-based index funds have come to affect the prices that consumers pay for energy.

Benchmark crude for October delivery rose 81 cents to $73.30 on the New York Mercantile Exchange. Oil prices earlier this week hit $75, a high for the year.

Oil prices are threatening to hit new highs in a week when the government reported that more unused crude is being placed into storage. The U.S. is also nearing the end of the driving season, when demand generally falls.

Demand for gasoline is already weaker than it was last year, even though right now it costs a dollar less to buy every gallon.

Overnight, retail gasoline fell nearly a penny to $2.613. That's a dime more than gas cost a month ago, largely because of refineries have cut production to match falling demand.

It is difficult to predict how long oil prices can remain at current levels when so little of it is being used. Yet value of a barrel of oil will likely remain elevated as long as investors are skittish about the health of banks and other businesses.

Money under the control of the Federal Deposit Insurance Corp. has been severely depleted by the wave of collapsing financial institutions. Some analysts warn that the FDIC, which guarantees bank deposits, could be losing money by the end of the year.

To a lot of big investors, oil looks like a pretty safe place to park money right now.

"Oil became a safe haven as traders lost confidence in the U.S. banking system (and) ran to oil to protect themselves from the deteriorating economic world around us," said PFGBest analyst Phil Flynn. "Now some critics now call that excessive speculation but what I call it is reflection of the reality. You have to remember the value of any commodity when expressed in a currency will ultimately be determined by the confidence and faith in that underlying instrument."

It seems nothing can prop up prices for natural gas, which hit seven-year lows this week. There is so much gas being pumped into the ground that the U.S. is running out of places to store it. That is largely because big energy users, like manufacturers, have cut back severely on operations as they ride out the recession.

Natural gas prices fell 11 cents to $3.095 per 1,000 cubic feet.

In other Nymex trading, gasoline for September delivery rose 2.2 cents to $2.0535 a gallon and heating oil rose 2 cents to $1.8787 a gallon.

In London, Brent crude rose 54 cents to $73.05.

The Associated Press