Rising oil prices driven by global weather, markets and politics

Crude oil prices topped $90 a barrel Tuesday, an increase of 29 percent since the end of September. Image: CC post1-lowem-2/Picasa Web Albums

Crude oil prices soared on Tuesday to pass $90 a barrel, a 26-month high. A weaker dollar and cold weather were cited as primary factors for rising oil and gas prices. A compromise with Republicans by the Obama administration that involved extending the Bush tax cuts, and traders hedging against the weaker dollar are also affecting oil prices.

Oil prices hit 26-month high

The West Texas Intermediate (WTI) crude oil price Tuesday climbed above $90 a barrel for the first time since October 2008. WTI crude oil, also called Texas light sweet crude, is used as a benchmark in oil pricing and is the commodity traded as oil futures on the New York Mercantile Exchange (NYMEX). Crude oil futures rose as U.S. inventories declined, according to the Energy Department. Oil inventories have decreased by 40 million barrels over six weeks, and supply is expected to tighten further. Demand for heating oil in the U.S. was forecast at 16.3 percent above normal for the week ending Dec. 11, according to the National Weather Service. In Europe, below normal temperatures are driving above normal energy demand.

The Bush tax cuts and oil prices

WTI crude oil prices surged after President Obama said he will agree to a two-year extension on all Bush tax cuts in return for extending unemployment benefits and cutting the payroll tax by 2 percent in 2011. Investors anticipate extending the Bush tax cuts will strengthen economic recovery, a good thing for oil prices and oil companies. A stronger U.S. dollar had been keeping crude oil prices in check, but recent Federal Reserve monetary policy moves have eroded the dollar’s value. In response, traders looking for a hedge against the declining currency have been buying WTI crude oil futures, driving up the price.

Gas prices expected to soar in 2011

Speculators have pushed wholesale gas futures up by 55 cents a gallon over the last three months. National gas prices have risen more than 10 percent on average in the past week. U.S. consumers can expect the trend to continue. OPEC’s governor, an Iranian, said said the rise in oil price does not yet compensate for the fall in the dollar and that oil will soon reach $100 a barrel. Energy analysts expect gas prices to approach $4 a gallon early in 2011.