Oil prices fall while Fed raises rates to 3.5%

Oil prices fell from a record peak yesterday as dealers took profits, but tensions in the Middle East and a flurry of refinery problems in the US kept losses in check.

US crude futures fell 74 cents (€0.59) to $63.20 a barrel, down from a peak of $64.27 in electronic trade before the regular session began, while London Brent crude shed 75 cents to $61.95 a barrel.

The news came as the US Federal Reserve increased wholesale interest rates by 25 basis points or one quarter of 1 per cent to 3.5 per cent.

Oil dealers took their profits as Opec president, Sheikh Ahmad al-Fahd al-Sabah of Kuwait, said yesterday that global oil supply was exceeding demand and the US government issued a report predicting higher stockpiles on the East Coast this winter than last year - easing worries of a heating oil crunch.

"These incremental volumes have led to global supply exceeding demand over the last two years, allowing stocks to continue to build to well over the five-year average," Sheikh Ahmad said in a statement released by the Opec news agency.

But dealers said the market remained on a bullish footing, due to security concerns in Saudi Arabia, tensions in Iran, and a spate of refinery trouble in the United States that could crunch fuel stockpiles.

"The market has given its verdict: it's going to be above $60 for quite a long time," said Kevin Norrish of Barclays Capital.

In the world's top exporter Saudi Arabia, US missions were shut for a second day because of the threat of attacks.

The United Nations' nuclear watchdog, meanwhile, was to hold an emergency meeting in Vienna after Opec's second biggest producer Iran restarted work at a uranium conversion plant, defying the European Union and running a risk of UN sanctions.

As widely expected, the Fed pushed benchmark overnight lending rates up by a quarter-percentage point to 3.5 per cent - the 10th consecutive move in a rate rise campaign that began more than a year ago.

It also signalled that more rate hikes were in the offing.

"Core inflation has been relatively low in recent months and longer-term inflation expectations remain well contained, but pressures on inflation have stayed elevated," it said in a statement outlining its rate decision.

Financial markets look for overnight rates to hit 4 per cent or higher by year-end, and some economists predict the Fed will continue to raise them in 2006.

Fed chairman Alan Greenspan told Congress last month the course of productivity and related moves in unit labour costs would heavily influence the central bank's thinking.

"Over most of the past several years, the behaviour of unit labour costs has been quite subdued," Mr Greenspan said. "But those costs have turned up of late, and whether the favourable trends of the past few years will be maintained is unclear.

"Rapid productivity growth allows businesses to pad profits or boost pay without a need to raise prices for their products or services."