OPEC vs the key interest rate

[WI Crippler]

Just heard a little blurb on the TV today about OPEC cutting production even further, but the key interest rate being cut caused oil prices to drop anyway. Is this true, and if it is, what is the correlation between the price of a barrell of oil and our interest rates here in the US?

 

[donsutherland1]

WI Crippler,

OPEC's production cut and the Fed's interest rate cuts should both contribute to higher oil prices. The OPEC cut would lead to lower supply relative to demand. The Fed's interest rate cut would lead to a lower value of the dollar on foreign exchange markets and, as the price of crude oil is denominated in dollars, that should translate into a higher oil price.

Today, the price of crude oil fell. With a few minutes to go before the close of open outcry trading, the price of crude oil appeared headed for its lowest closing price since July 13, 2004. First, the production cut may be too small relative to the decline in demand given expectations about the global recession. Second, traders might have expected a larger cut in production. Third, there may be concern about "cheating" among OPEC members. Fourth, traders might also be anticipating that the dollar will recover some of the ground it lost against the Euro in early January (the European Central Bank could cut its benchmark rate at that time).