Crude Oil Rises on Lower Dollar, Possible Libya Production Cut

By Mark Shenk

June 26 (Bloomberg) -- Crude oil rose more than $3 a barrel as a lower U.S. dollar spurred investors to purchase commodities as a hedge and Libya said it may cut production.

Oil has more than doubled over the past year as the dollar dropped against the euro. The U.S. currency weakened after the Federal Reserve gave no signal of higher interest rates yesterday. The head of Libya's national oil company said the country may reduce output because the market is oversupplied.

``Commodities are rallying because there's a lack of confidence that the Fed will raise rates,'' said Phil Flynn, a senior trader at Alaron Trading Corp. in Chicago. ``They didn't raise rates yesterday and it doesn't look like they will raise them soon. Their statement yesterday was too wishy-washy.''

Crude oil for August delivery rose $3.78, or 2.8 percent, to $138.33 a barrel at 9:10 a.m. on the New York Mercantile Exchange, after rising as much as $4.40 a barrel. Prices reached a record $139.89 on June 16.

The dollar is also down on a forecast that the European Central Bank will boost interest rates. The dollar's drop against the euro made commodities cheaper for buyers outside the U.S. The dollar was at $1.5727 per euro as of 9:20 a.m. New York time, compared with $1.5574 earlier.

``There's no reason for prices to rise $4 in 10 minutes,'' said Peter Beutel, president of energy consultant Cameron Hanover Inc. in New Canaan, Connecticut. ``Things are very unsettled and now the worry is that the European central bank may raise rates, which would be the same as another Fed cut.''

Benchmark Rate

The Federal Reserve yesterday left its benchmark interest rate at 2 percent and said ``uncertainty about the inflation outlook remains high'' as energy and commodity prices continue to rise. Leaving the interest rate unchanged ended the most aggressive series of rate cuts in two decades.

Libya's National Oil Corp. Chairman Shokri Ghanem declined to say when a decision would be made on whether to lower Libyan production or give any indication of the size of the cut under consideration.

He said the reductions may also be made because of threats of sanctions against Iran and U.S. legislation allowing lawsuits against the Organization of Petroleum Exporting Countries.

Brent crude oil for August settlement rose $3.37, or 2.5 percent, to $137.70 a barrel on London's ICE Futures Europe exchange. Prices climbed to a record $139.32 on June 16.

To contact the reporter on this story: Mark Shenk in New York at mshenk1@bloomberg.net.