"If the economy's going to be OK, then oil prices are probably undervalued," said Phil Flynn, an analyst at Alaron Trading Corp. in Chicago.
Oil futures rose as high as $80.70 today, a trading record. Oil prices have set several new records over $80 a barrel in recent days for a number of reasons, including perceptions that problems in the subprime mortgage industry would have a minor effect on the economy. The nine-session rally reversed August's downward trend, which was based in part on concerns that the subprime problems would spread, affecting the overall economy and curbing demand for petroleum products.
A Fed rate cut could add further buying momentum, analysts said — depending on its size.
"A 25-basis point (or quarter percentage point) cut could lead to further selling of oil futures over concerns that such ... a move is not large enough to prevent a slowdown in the U.S. economy," wrote Addison Armstrong, an analyst at TFS Energy Futures LLC in a research note. "On the other hand, a 50-basis point (or half percentage point) cut will be perceived as an aggressive move by the Fed to stave off a recession and is, therefore, likely to be received as bullish for oil."
Prices were also being supported by concerns about tropical weather systems in the Caribbean and the central Atlantic. Though the systems are far from developing into tropical storms or hurricanes, some investors buy on any hint that weather could disrupt critical oil and gas operations in the Gulf of Mexico.
Light, sweet crude for October delivery rose $1.47 to settle at a record $80.57 a barrel on the New York Mercantile Exchange, the contract's second-ever close over $80. Though they are at record Nymex trading highs, oil prices are still well below inflation-adjusted highs of $96 to $101 a barrel achieved in the early 1980s.
October gasoline rose 0.78 cent to settle at $2.0442 a gallon on the Nymex, while heating oil futures rose 2.09 cents to settle at $2.2287 a gallon.
October natural gas jumped 37.4 cents to settle at $6.653 per 1,000 cubic feet. In addition to tropical weather jitters, natural gas prices were being supported by forecasts for hot weather in the Midwest later this week.
Beyond the economic worries, energy futures have been buffeted by supply and demand considerations in recent weeks. Last week, gasoline and oil prices jumped after Hurricane Humberto cut power to Texas, temporarily shuttering several refineries.
Most of those facilities are now in the process of restarting. But the incident reminded investors of how quickly a hurricane can develop and disrupt energy supplies.
Another factor supporting oil prices has been buying by speculators and investment funds. However, data released on Friday shows that funds reduced their long-term investments in oil futures last week, surprising many analysts. Some took the reduction as a sign prices could rise beyond $80 if funds resume buying.
At the pump, meanwhile, gas prices slipped 0.6 cent overnight to a national average price of $2.788 a gallon, according to AAA and the Oil Price Information Service. Despite oil's rise, retail prices, which typically lag the futures market, have fallen an average 1.3 cents since Friday. Prices peaked at $3.227 a gallon in late may.
Many analysts doubt gas prices will necessarily follow oil prices higher, noting that demand for gasoline ebbs in the fall, and that producers can now sell winter grade gasoline, which is cheaper and easier to make.
