Oil rises on waning US recession fears

Crude oil rose for the first time in three days on speculation the US Federal Reserve will cut interest rates today.

Oil gained as much as 0.7 per cent as financial futures contracts show investors expect the Fed to lower its benchmark overnight rate by at least a quarter-percentage point to 4.25 per cent. Lower borrowing costs may spur demand and investments in commodities.

"A cut by the Fed would be positive," said Eugen Weinberg, an analyst at Commerzbank in Frankfurt. "A 25 basis point cut is pretty much factored in already."

Crude oil for January delivery rose as much as 72 cents, or 0.8 per cent, to $88.58 a barrel in after-hours electronic trading on the New York Mercantile Exchange. It traded at $88.35 barrel at 9:42 am in London. Prices have declined 11 per cent from the record $99.29 reached on November 21.

Brent crude oil for January settlement rose as much as 70 cents, or 0.8 per cent, to $88.74 a barrel, and traded at $88.44 at 9:44 am local time on the London-based ICE Futures Europe exchange. Brent reached $96.65 a barrel on November 26, the highest since trading began in 1988.

US gasoline stockpiles probably climbed for a fifth time last week, gaining 1.5 million barrels, based on the median estimate of 10 analysts surveyed by Bloomberg. The Energy Department releases its weekly supply profile in Washington tomorrow.

"Consumption is slowing down," said Andy Sommer, an analsyst HSH Nordbank in Hamburg. "We have problems with higher financing costs from the sub-prime crisis, and that should lead to slower consumption of gasoline in the coming months."

Supplies of distillates, which includes heating oil probably increased 500,000 barrels, their second gain. Crude oil inventories probably rose 50,000 barrels after dropping 7.9 million barrels a week earlier as fog closed the Houston Ship Channel, limiting imports.

The channel was closed again yesterday because of poor visibility.

The US will slip into a "mild" recession next year, Morgan Stanley said in its latest research yesterday, joining Merrill Lynch in predicting a slowdown for the world's largest economy.

Growth will slow to a 0.4 per cent pace in the current quarter, followed by declines of 0.3 per cent in each of the first two quarters of 2008, Richard Berner, chief US economist for Morgan Stanley in New York, said in his weekly note to clients.