Oil slides to near $78 after Fed raises emergency lending rate

London: Oil prices fell to near $78 (Dh286) a barrel yesterday after the US Federal Reserve raised its emergency lending rate, stirring fears that monetary tightening could slow demand growth in the world's largest oil consumer and stem investment flows into commodities.

The Fed's move to increase the discount rate to 0.75 per cent from 0.50 per cent also spurred selling in European shares, gold and other commodities.

The dollar jumped to an eight-month high against a basket of currencies and this also weighed on oil prices. Oil tends to fall when the dollar rises as it makes oil more costly for buyers using other currencies.

Delivery falls

US crude for March delivery fell 94 cents to $78.12 a barrel by 1008 GMT after earlier falling by more than $1 to a low of $77.76 a barrel.

ICE Brent crude for April fell 98 cents to $76.80 a barrel by the same time.

"It's all about the Fed move," said oil trader Rob Montefusco at Sucden Financial. "Although they say this is not a move towards further tightening we have still seen a healthy correction."

Although the benchmark federal funds rate was left unchanged at near zero, the decision to increase the rate the Fed charges banks for emergency loans raised concerns that the loose US monetary policy of 2009 could begin to shift.

Oil prices have firmed gradually from lows of near $30 a barrel in Dec-ember 2008 to the current range between $70-$85 a barrel as low lending rates have encouraged investors to pour funds into commodities as a hedge against future inflation.

"The Fed's move was clearly a shot across the bow, and will likely be followed by further steps to sop up the excess liquidity now permeating through the system," said analyst Edward Meir at MF Global.

Last Friday, China's central bank said it would lift bank reserve requirements in an unexpected tightening move that could slow demand in the world's No. 2 fuel consumer.

Cold weather

Data released on Thursday by the Energy Information Administration (EIA) showed that US crude stocks rose by a more-than-expected 3.1 million barrels to 334.5 million barrels in the week ending February 12.

Gasoline stocks rose 1.7 million barrels, but distillates fell 2.9 million barrels.

"Fundamentally, we are still weak. Crude is up, gasoline is up and distillates are down mainly because of the cold weather on the east coast," said Clarence Chu, analyst at Hudson Capital.

The number of US workers filing new applications for unemployment insurance unexpectedly rose last week by 31,000 to 473,000, raising potential hurdles for the economic recovery.