Oil Rallies On Fed Plan To Pump Up Economy

The price of oil climbed more than 7 percent to $51.61 a barrel yesterday as commodity prices rallied across the board, buoyed by a weakening dollar and the prospect of an economic recovery fueled by the Federal Reserve.

The price of copper, corn, gold and other products surged, pushing the Dow Jones-AIG Commodity Index up 5.7 percent. The price of crude oil on the New York Mercantile Exchange jumped $3.47 a barrel to the highest level in nearly three months. Yesterday's closing price was $19.19 a barrel more than the price to which crude oil had slumped as recently as Dec. 19.

Analysts said that because most commodity markets close trading early in the afternoon, yesterday was the first time traders could react to the Fed's announcement Wednesday that it would pump $1.2 trillion into the economy.

"The commodities markets today had the rally that the stock market did yesterday," said Adam Sieminski, chief energy economist at Deutsche Bank.

The Fed announcement bolstered commodities prices by holding out the prospect that a stronger economy would boost demand for raw materials and that an economy revived with government spending and credit might lead to inflation. So investors were looking for opportunities and protection.

The price of oil, or any other commodity, tends to rise with inflation and when the dollar falls, and it benefits from increased economic activity. "It's a three-fer," Sieminski said.

The price of copper, closely linked to construction, rose 6.5 percent to the highest level in four months. The Fed had said Wednesday that it would expand purchases of mortgage securities to help the housing market.

The demand for cotton is not closely linked to the economy, and exports fell last week. But cotton prices rose 2.6 percent in part because of concern about the slumping dollar. The dollar slid to $1.367 against the euro, compared with $1.257 a month ago.

The price of gold, a refuge from inflation, increased the most since September. And silver prices surged, too.

Weakness in the dollar tends to increase the price of oil, which is bought and sold in dollars. For European consumers, the decline in the value of the dollar this week roughly offset the increase in the price of crude oil. The dollar has slumped 6.8 percent since March 9.

The increase in the price of oil comes just five days after the Organization of the Petroleum Exporting Countries met in Vienna and decided to leave production quotas unchanged. Although some OPEC members advocated new reductions in output to boost prices, the cartel's biggest producer, Saudi Arabia, said it was worried that new cuts and higher prices might further damage the struggling global economy.

Higher oil prices would also risk undercutting demand for petroleum, which could lead to lower prices and new pressure for OPEC production cuts. OPEC has already lowered production targets by 4.2 million barrels a day since September.

"It remains unclear where markets will head in the second quarter," Edward Morse, an energy expert at LCM Research, said in a report this week. "Our own judgment is that in the race between declining demand for petroleum products and declining OPEC production, declining demand is leading the race so far."

Energy Information Administration figures released Wednesday provided new evidence of weak demand in the United States. It showed a modest increase in U.S. inventories of crude oil, gasoline and distillates such as diesel and heating oil. Weak demand for petroleum products has pushed U.S. oil inventories well above their five-year average.

The Federal Highway Administration said yesterday that U.S. motorists cut back on driving again in January. Estimated miles traveled on all roads fell to 222.4 billion miles, down 3.1 percent from January 2008. It was the lowest January total since 2004. The steepest drop of any state, 10.2 percent, came in Ohio, which has been hard hit by the housing and financial crisis.