Crude Oil Breaches $90 a Barrel on Dollar Drop Against Euro

By Bill Murray
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Oct. 19 (Bloomberg) -- Crude oil breached $90 a barrel in New York for the first time as the dollar traded near a record low against the euro, enhancing the appeal of commodities as an investment.

Investors purchased oil on speculation the Federal Reserve will cut borrowing costs to bolster the U.S. economy when policy makers meet on Oct. 31. Oil futures set records the past four days on concern supplies from northern Iraq may be disrupted if Turkey takes military action against Kurdish rebels.

"The weak dollar is pushing the price higher,'' said Simon Wardell, energy research manager with Global Insight Inc. in London. "It's hard to see how this is going to turn around quickly.''

Crude oil for November delivery rose to $90.07 a barrel in after-hours electronic trading on the New York Mercantile Exchange, the highest since trading began in 1983. Prices were up 39 cents on the day at $89.86 at 12:06 p.m. in London.

"The search for explaining the price development during this week leaves three elements outside the market fundamentals namely, the role of speculators, geopolitical developments in the Middle East and the weakness of the dollar,'' PVM analysts led by Johannes Benigni wrote in a report today.

Brent crude oil for December settlement last traded at $84.64 a barrel, up 6 cents.

Turkish lawmakers this week cleared Prime Minister Recep Tayyip Erdogan to authorize one or more military assaults against Kurdish rebel bases in Iraq within a year. Iraq will halt its oil exports through Turkey if attacked, Foreign Minister Hoshyar Zebari said yesterday.

Falling Dollar
Concern remains over the conflict spreading to other parts of Iraq and the region, said Wardell.

The U.S. currency fell to $1.4302, from $1.4279 yesterday, and traded at a record low of $1.4319 earlier.

A lower dollar makes oil cheaper in countries that use other currencies. In U.S. dollars, West Texas Intermediate, the New York-traded crude-oil benchmark, is up 46 percent so far this year. Oil is up 35 percent in euros, 40 percent in British pounds and 42 percent in yen.

The spread price between WTI and Brent, the European benchmark, widened to $5.08 a barrel, the largest gap since November 2004, as option traders in New York attempt to move the price of WTI for December delivery above $90 a barrel, said Oliver Jakob, managing director of Petrmatricx GmbH in Zug, Switzerland.

The December crude contract in New York is up 13 cents to $88.17 a barrel.

'Upside Potential'
"The real upside potential is as we approach $90 on December WTI, we will see some more upside that has nothing to do with the fundamentals and weak dollar,'' Jakob said in an interview.

The November WTI crude contact expires on Oct. 22. The most actively traded oil option contract yesterday was the call option for December crude at a strike price of $90 a barrel. The value of that option surged 44 percent yesterday and has risen almost tenfold since Oct. 8 to trade at $2 today.

A call option gives the holder the right, but not the obligation, to buy a contract at a specific price.

The Organization of Petroleum Exporting Countries, agreed last month to produce an extra 500,000 barrels a day starting on Nov. 1 to meet rising demand. World oil consumption peaks in the fourth quarter, when refiners make heating fuel for winter.

"Additional output from OPEC won't affect the market that's reacting to non-fundamental factors,'' Maizar Rahman, Indonesia's OPEC governor said in Jakarta today. "The weakening U.S. dollar is prompting investors to move funds to commodities futures from currencies.''