Oil futures closed above $100 per barrel for the first time ever today (February 19). US equities gave up… … huge early gains in large part because of heightening inflation concerns.

While much of the government and Central Bank efforts have been focused on stimulating the stale economy, several members of the Fed have recently expressed growing concern for inflation.

Oil made a strong move back over $100 after it dropped below $90 just a week ago. A Texas oil refinery suffered an explosion today, and word of OPEC production cuts were cited as the biggest motivators for today’s strong move in oil. Light sweet crude oil was up a remarkable $4.51 in New York, with a close at $100.01.

Many analysts are concerned that today’s move was especially strong, even with the news items. Some oil watchers believe oil is on its way to a strong move up from $100. More disconcerting to US consumers is the greater likelihood of new record gas prices this summer. National gasoline prices jumped about two cents on average Tuesday, to $3.032. Talk of $3.50 per gallon summer gasoline prices has been circulating for a while, and that talk was louder with today’s moves.

Inflation readings have been slightly higher than the Fed would like for several months. As the dollar grows weaker and the economy remains uncertain, there is even greater potential that consumers will suffer through record high gas rates. It seems inevitable that the $3.227 record gasoline average from last May will be eclipsed within a matter of months.

Along with the effect oil prices have at fuel pumps, home owners are struggling through an especially cold, and expensive, winter heating season. The oil spike and weak dollar are definitely giving the Fed competing concerns. It is very difficult for the Central Bank to manage interest rates in a way that provides for economic growth, while keep inflation in check. At least until now, most Bank Board members have opted to place economic stimulus as the higher priority.

The explosion at the Texas oil refinery is likely to effect production at the 67,000 barrel per day refinery. While this is obviously not a good situation, the speculative reaction is probably greater now than it will be from an ongoing perspective. Market analysts are more concerned with ongoing political and military unrest in many important world oil markets. Iraq, Nigeria, and Venezuela are a few of the key OPEC members dealing with uncertain political situations.

The political unrest and still weak dollar seem to be the biggest catalysts behind speculative oil futures. Investors seem to believe the US economic situation will hold the dollar down. As a country reliant on mostly foreign oil, a weak currency is a strong contributor to soaring oil prices. The dollar is not worth as much to foreign oil producers at the moment.

Interestingly, from a supply and demand perspective, there should be more downward price pressure on oil. Recent surveys have shown slightly higher production, and slightly lower demand for oil. This relationship should prompt a reduction in price. Again, this supports the notion than the weak dollar, and growing inflation, are key contributors to the rising oil prices.

The good news for Americans is that record gasoline prices should come during the warmer months for most. This should bring some relief in heating costs to help offset the record fuel prices. Gasoline is a highly elastic product for American consumers who are especially dependent on car transportation. While consumers do express greater irritation with rising prices, and some do turn to car pooling, most drivers seem to accept that they will pay whatever is asked by the market. Many will likely use their November presidential vote to express their feelings about the dollar, gas, and other things.

Market Recap

US financial markets were closed Monday with the President’s Day federal holiday. Tuesday, equities opened strong, with the Dow posting nearly 200 points in early gains. The strong start was generated by great 4th quarter profit reports from Wal-Mart and HP. Oil prices closed over $100 for the first time, and inflation concerns caused stocks to give back gains by the market close. The Dow finished off 11 points at 12,337, while the NASDAQ and S&P closed down 15 and 1, respectively.

Neil Kokemuller
Tuesday, February 19, 2008
6:50 PM EST

Neil Kokemuller is an Associate Professor of Marketing at Des Moines Area Community College in Des Moines, Iowa, USA. He has a MBA from Iowa State University with a specialization in marketing.

Please note: The information provided in this article is intended for informational and entertainment purposes, and not as advice for financial decisions or investments. Actions taken on the basis of the information shared is at the sole risk and discretion of the individual. Currency investment poses significant risk of loss.