A day after the Federal Reserve left its benchmark lending rate unchanged, oil on 26 June 2008 surged to a record high.

A coincidence? Not in the minds of some market participants, who watched the dollar slide to a three-week low against the euro and oil prices surge past US$140 a barrel for the first time.

It took crude on the New York Mercantile Exchange five weeks to climb to US $140 a barrel from US $130, a round number first hit May 21. With the Fed expected to keep rates on hold for the foreseeable future and with the European Central Bank expected to approve another rate hike next week, another US$10 assault could be in sight if the dollar hits new lows.

“There’s no question people are eyeing the US$150 mark now,” said Tony Rosado, an oil broker at GA Global Markets in New York.

On June 6, oil accomplished its largest one-day gain in history - US$10.75 - a day after ECB President Jean-Claude Trichet signaled the bank could raise euro zone interest rates. On the back of the Fed’s decision Wednesday to hold rates steady, higher European rates could create a hostile environment for anyone trying to bet that crude oil prices will fall.

“At the heart of all this is the ongoing fear Trichet is going to raise European rates - that would put pressure on the dollar and in turn support oil,” said Peter Beutel, president of Cameron Hanover, an energy risk management firm in New Canaan, Conn.

On Thursday, the Organization of Petroleum Exporting Countries’ president, Chakib Khelil, helped kindle the latest rally when he told a French TV channel he foresees “probably prices of US$150 to US$170 during this summer.” He blamed the devaluation of the dollar as the principal culprit behind high oil prices, and said a further slide of 1% to 2% against the euro could generate an $8 rise in oil prices.

Oil-Dollar Redux

The persistent decline of the dollar has coincided with a doubling of oil prices over the past year. A weaker dollar blunts the effect of high oil prices for buyers using foreign currencies. When oil exporters recycle their billions of dollar-denominated revenues into euro-denominated assets, that adds pressure to the greenback.

Because oil and other commodities are a crucial ingredient of overall inflation, as high energy prices trickle into the broader economy, investors have flocked to this asset class as a hedge against rising prices.

Daily moves in the price of oil, however, are often dictated by sentiment and the market’s ability to overcome psychological barriers.

Traders in the oil market often work off a series of “resistance levels,” or prices that, when crossed, spark a wave of buying or selling. US$140 a barrel was one such level, and the next could be as high as US$152 a barrel, said Mark Waggoner, president of Excel Futures in Newport Beach, Calif.

At some point, resistance becomes too great, and a selloff can ensue. In the world of supply and demand, that point is hit when consumption begins to rapidly fall. But it’s impossible to know when the market will reach that point, Waggoner said.

“You have to deal with perceptions when you get there,” he said. “To speculate at what the perception is going to be at a price you’ve never been at before, I don’t know how you do that.”

Demand is certainly under pressure, with oil demand over the last four weeks in the US down 2.3% year-over-year and several fast-growing economies, including China, loosening price controls in response to record crude prices. Even analysts who see the market as fundamentally tight are offering no excuses for current levels.

“The market needs a little bit of a pause,” said Kevin Norrish, director of commodities research at Barclays Capital in London. Norrish believes prices are likely to stabilize between US$120 and US$130 a barrel this summer.

A sudden halt to rapid, daily increases wouldn’t signal that the rally is over, however. Norrish said the world has exhibited a “very poor supply response,” with little boost to production even as demand from Asia has grown rapidly.