Oil prices dropped more than $1 a barrel on Wednesday after jumping higher in the previous session on the expectation that another cut in US Federal Reserve interest rates would further weaken a battered dollar.
The Fed said on Tuesday it was lowering its key federal funds rate by three-quarters of a percentage point as it tries to stave off a severe economic crisis. Many investors expected a full point cut, but the Fed indicated it was concerned about higher inflation even as it was trying to shore up the economy.
"With (yesterday's) 75-basis-point reduction in key short-term interest rates, the Fed continues its eight month trend of loosening credit which will, in turn, continue the downtrend in the value of the dollar," wrote Platts Chief Economist Larry G Chorn in a research note.
In the past several months, rate cuts have fed oil price rallies as investors have bought crude futures to hedge against inflation and the declining dollar. Also, oil futures are priced in dollars, which makes them cheaper for foreign investors as the greenback falls.
The rate reduction by the Fed "could result in oil prices rising to the $112 to $115 (a barrel) range over the course of the next weeks, assuming the other (Group of 10 industrial nations') central banks hold their rates constant," Chorn wrote.
Light, sweet crude for April delivery dropped $1.12 a barrel to $108.30 a barrel in Asian electronic trading on the New York Mercantile Exchange by midmorning in Singapore.