Oil surges on Fed move

Crude oil surged as the US Federal Reserve lowered its discount rate during an unscheduled meeting, while a hurricane bound for the Gulf of Mexico gathered strength and speed.

The Fed reduced its discount rate, the rate it charges for direct loans to banks, to 5.75 per cent from 6.25 per cent. Lower interest rates should spur economic growth, which in turn would increase demand for oil.

"The market is reacting positively because if the Fed adds liquidity, it shows they are reacting quickly," said Hannes Loacker, an analyst at Raiffeisen Zentralbank Oesterreich AG in Vienna.

"There is a fear the credit crunch could lead to weaker demand for oil products, and this is trying to take some of the fear away."

Crude oil for September delivery rose as much as $1.54, or 2.2 per cent, to $72.54 a barrel on the New York Mercantile Exchange, trading for $72.06 at 8:51 a.m. New York time. Brent crude for October settlement climbed as much as 2.4 per cent to $70.75 on London's ICE Futures Exchange.

"The cut may ease the liquidity crisis in the US," said Christopher Bellew, a broker at Bache Financial in London.

"Of course you interpret it as an indication of how serious they think the problem is. I think the lasting support will come from oil fundamentals, like the hurricane and refinery glitches."

Oil was already gaining after Hurricane Dean battered the Lesser Antilles in the Caribbean today. The storm is expected to cross Mexico's Yucatan Peninsula on August 21 before blowing into the Gulf of Mexico, where hurricanes Katrina and Rita wrecked oil rigs, pipelines and refineries in 2005.