Oil rises to near $80 in Europe as investors expect Fed to keep interest rates low

Oil prices rose to just below $80 a barrel Monday after a three-week rally, as investors expect the U.S. central bank to keep interest rates near zero to help fuel economic growth — which would boost crude consumption.

By early afternoon in Europe, benchmark crude for March delivery was up 10 cents to $79.91 a barrel in electronic trading on the New York Mercantile Exchange. The contract added 75 cents to settle at $79.81 a barrel on Friday.

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Prices were mimicking changes in the dollar’s exchange rate. The dollar makes oil less attractive to investors holding other currencies when it strengthens and makes crude cheaper for them when it weakens.

The euro was up to $1.3610 from $1.3599 in late New York trading Friday, but below its session high of $1.3652, which was reflected in a peak oil price of $80.51.

Investors are betting that a low inflation rate and weak employment figures will lead the Federal Reserve to keep interest rates low.

The Fed surprised investors late Thursday when it raised the so-called “discount” lending rate on emergency bank loans by one-quarter point to 0.75 percent. But Fed officials on Friday were quick to downplay the possibility of across-the-board rate hikes.

Consumer prices edged up 0.2 percent in January, the Labor Department said Friday, and excluding volatile food and energy, prices fell 0.1 percent, the first monthly decline since December 1982.

“There’s hardly any fear of inflation right now,” said Victor Shum, an energy analyst with consultancy Purvin & Gertz. “So the thinking is the Fed will keep interest rates near zero.”

“With unemployment still high, the market doesn’t expect the Fed to raise rates until the U.S. economy is stronger.”

A strike by workers at oil refineries in France was also seen supporting prices.

“At the moment, France still has stockpiles of 10 to 20 days of demand available … meaning that any widespread fuel shortages are unlikely to materialize in the next couple of days,” said JBC Energy in Vienna. “However, as there is currently no end in sight to the strike … the situation could become worse in the foreseeable future.”

Daily fluctuations notwithstanding, oil has jumped over $10 from its Feb. 5 price of $69.59 a barrel.

“Investors are back buying with a vengeance,” said a report from U.S. energy consultancy Cameron Hanover. “We would buy into any dips this week.”

Still, doubts about the strength of demand are still weighing on the market.

“Oil refining remains the sore spot for the industry, however, as oil demand in the west is growing slower than economies are recovering,” said a report from KBC Energy Economics in Britain.

In other Nymex trading in March contracts, heating oil rose 0.67 cent to $2.0766 a gallon, and gasoline gained 1.31 cents to $2.0988 a gallon. Natural gas dropped 12.5 cents to $4.919 per 1,000 cubic feet.

In London, Brent crude was up 16 cents at $78.39 on the ICE futures exchange.

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