Oil prices fell to near $78 a barrel Friday after the U.S. Federal Reserve's unexpected hike to interest rates for emergency loans to banks boosted the dollar, making commodities less attractive to investors.
By early afternoon in Europe, benchmark crude for March delivery was down $1.05 to $78.01 a barrel in electronic trading on the New York Mercantile Exchange. The contract was trading between $77.76 and $78.46. On Thursday, it added $1.73 to settle at $79.06 on Thursday.
The Federal Reserve said late Thursday it will bump up the so-called "discount" lending rate by one-quarter point to 0.75 percent effective Friday. The surprise move, which doesn't affect consumer lending rates, helped weaken the euro to $1.3489 on Friday from $1.3529 the previous day.
"The move came as a total surprise to the market which will now price in a higher chance that a Fed fund rate increase will come in earlier than expected," said analyst Olivier Jakob of Petromatrix in Switzerland. "On a fundamental basis, our opinion is that crude oil is overpriced by about $10 a barrel."
A stronger dollar makes commodities priced in the U.S. currency more expensive for investors with non-dollar funds. A weakening dollar helped fuel the run-up of the oil price to $147 a barrel in July 2008.
Crude has traded between $69 a barrel and $84 for most of the last six months.
"If the dollar keeps rallying, crude could drop below $70," said Clarence Chu, a trader with market maker Hudson Capital Energy in Singapore.
A report Thursday from the United Nations' International Atomic Energy Agency saying Iran may be working on making a nuclear warhead was seen as supportive for oil prices.
"The fear of Iran has always been instrumental in the price run-ups of 2007 and 2008, fueling the 'what-if' scenarios that are necessary for bull runs and this year might not be different," Jakob said.
In other Nymex trading in March contracts, heating oil fell 2.61 cents to $2.0255 a gallon, and gasoline dropped 2.67 cents to $2.0425 a gallon. Natural gas eased 3.7 cents to $5.135 per 1,000 cubic feet.
