Oil up $10 a barrel so far today

June 6, 2008

Update 2:28PM: oil now up over $11–

Oil is near $139 a barrel as I write this, a record high even after accounting for inflation.

Lots going on here. The biggest issue may be comments from the European Central Bank Chair suggesting a possible rate increase later this year. Interest rate hikes for the Euro, or simply the prospect of them in the future, strengthens that currency versus the dollar as investors searching for higher yields will sell dollar-denominated fixed-income investments in favor of Euro-denominated ones.

Oil, a commodity priced in dollars, has become a play on the weaker dollar. The falling value of the dollar means it can buy less oil, hence the dollar cost of oil goes up.

Also, the jobs report was very weak today. With nonfarm payrolls falling 49,000 in May the unemployment rate jumped to 5.5% from 5.0% last month. Deteriorating employment weakens the economy and gives the Fed less room to raise rates later in the year. Tough talk two days ago from Ben Bernanke was intended to suggest the Fed might do exactly that: raise rates later in the year to fight inflation.

Historical Crude oil prices from the Energy Information Administration

Oil responded to those comments the day Bernanke made them, falling $2 a barrel to $122.30.

And yet after today’s employment report and the threat of higher rates in Europe, investors appear to be calling Bernanke’s bluff.

Will he actually raise interest rates to combat inflation in the face of continuing economic weakness? Markets appear skeptical.

Also driving oil’s price today, comments from Shaul Mofaz that Israel may be forced to bomb Iran’s nuclear facilities if Iran refuses to stop enriching uranium for a nuclear weapon. Mofaz is Israel’s Transporation Secretary, and a potential successor to embattled Prime Minister Ehud Olmert.

Iran, of course, is a major oil supplier, and has threatened to bomb other oil facilities in the Mid-East if attacked.

Depending on your point of view, higher oil prices may be good news.

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