Oil climbs on central bank plan

Oil prices have been volatile on fears over the health of the US economy

Oil prices rebounded on fresh hopes that the global economy could remain robust after unprecedented action taken by a number of key central banks.

The plan to make available billions of dollars worth of loans to cash-strapped banks pushed a barrel of New York light crude up $4.37 to $94.39 a barrel.

A US government report showing an unexpected fall in crude stocks and heating oil raised supply fears.

Brent crude also hit $94 a barrel after sinking to $88 a barrel last week.

By the end of last week, world oil prices had fallen more than $10 from their November peak of near $100 a barrel.

The sell-off came when traders took profits as the certainty that the US economy would weather the sustained housing slump and financial market turmoil snapped and the spectre of a recession dawned.

Dramatic move

But a quarter point cut in US interest rates to 4.25% from 4.5%, delivered by the Federal Reserve after its meeting on Tuesday, persuaded energy traders that the Fed was focused on relieving the pressures facing the US economy and put oil back on the front foot.

These gains were dramatically extended following the earlier announcement that the Fed would team up with other key central banks, including the Bank of England and the European Central Bank, to assuage gummed up credit markets.

It is hoped the bold move will prevent commercial banks in the US, Europe and the UK from increasing charges on credit cards, unsecured loans and mortgages, bringing spending among indebted populations to a standstill.

"Anything the Fed is doing to help out is going to support oil prices," said Brad Samples, commodities analyst at Kentucky-based consultancy Summit Energy Services.

An energy department report showing US crude oil stocks at two-year lows after falling by a greater-than-expected 700,000 barrels supported fears that supply could be tight as the northern hemisphere prepares for a cold winter.

Stocks of distillate fuel, which include heating oil and diesel fuel, were also disappointing, declining 800,000 barrels. Analysts had predicted a decline of about 500,000 barrels.

A large oil spill off the Norwegian coast where 25,000 barrels of crude poured into the North Sea as it was being piped from a loading facility into an oil tanker would also have riled a sensitive market, analysts said.