Mixed response to rate cut

23 January 2008

The Federal Reserve's decision to cut the interest rate in the US on Tuesday had a mixed impact on crude oil prices.

Conditions in the global financial markets and plunging share prices prompted the Fed to take emergency action and reduce its benchmark interest rate from 4.25 per cent to 3.5 per cent in a bid to avert a recession.

Following the news US crude for February delivery settled at $89.85 (£45.87) a barrel, down 72 cents from the previous close on Friday. However, Brent crude for March delivery gained 94 cents to close at $88.45 a barrel.

Since reaching record highs in early January crude prices have fallen sharply because of fears a recession in the US could lead to a reduction in global demand for oil.

Analysts welcomed the Fed's move to halt the economic slowdown, but many interpreted it as a sign the problems in the US could be worse than first thought.

Phil Flynn of Alaron Trading told AFP that oil prices will plummet if that proves to be the case.

"The price of oil can come down dramatically and have one of the most significant corrections in years," added Mr Flynn.