BUSINESS

Oil gives up gains after Fed stops short of clear signal of economic aid

06/07/2012 02:32 EDT | Updated 08/07/2012 05:12 EDT
A morning rally in the price of crude had lost most of its momentum later in the day after Federal Reserve chairman Ben Bernanke's testimony to Congress provided no indication that the central bank is about to stimulate the economy.

Benchmark oil was US$85.12 per barrel in New York at midday, up nine cents from Wednesday's close. Earlier the price hit $87.03 per barrel after China cut its benchmark lending rate for the first time in nearly four years to try to reverse a slowdown in economic growth.

Brent crude, which is used to price international varieties of oil, fell 36 cents to $100.28 per barrel in London.

Meanwhile, already-low natural gas prices plunged 4.4 per cent or 12 cents to $2.30 per 1,000 cubic feet after the government said that over-abundant supplies continued to expand last week.

Supplies of natural gas have been building because of a boom in production and weak demand caused by mild weather. The supply is about 31.4 per cent above the five-year average.

Oil traders had hoped that the Fed would consider taking measures to promote growth after recent economic data, particularly the jobs report for May, painted a picture of slower economic growth.

Bernanke said the Fed remains ready to act if Europe threatens the U.S. economy. But he didn't indicate that any new steps were on the way.

Gene McGillian, a broker and oil analyst at Tradition Energy, said that China's rate cut could benefit oil prices by boosting economic growth and demand for oil in the world's second-largest economy. China imported 5.6 million barrels per day from January through April. That's up from 5.16 million barrels a day in the same period a year ago, according to the Energy Information Administration. But recent reports indicated that China's manufacturing sector, a big consumer of oil, has slowed.

As for the Fed, it has several options it could consider to try and boost the economy. The Fed could buy more bonds to lower long-term interest rates, which would encourage more borrowing and spending. Or it could extend its plan to keep short-term rates near zero beyond late 2014.

The Fed's previous stimulus efforts boosted oil prices because lower interest rates reduced the value of the dollar against other currencies. Commodities like oil are priced in dollars so the weaker dollar makes them cheaper for traders who use other currencies.

McGillian said Bernanke left policy-makers with room to manoeuvre in case the U.S. economy grows weaker or Europe's financial crisis worsens. In particular, traders are closely watching a June 17 election in Greece that could force the financially troubled country to leave the union of countries that use the euro as currency. There are growing concerns that Greece's departure could cause the European Union to collapse and hurt the global economy.

In other trading, heating oil fell one cent to $2.665 per gallon and gasoline futures dropped one cent to $2.683 per gallon.

At the pump, the national average for a gallon of gasoline fell half a cent overnight to $3.56 per gallon, according to AAA, Wright Express and the Oil Price Information Service. That's about 20 cents less than it was a month ago.

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