Oil rockets and pound leaps after US rate cut

Crude rose above $96 a barrel after the US Energy Information Administration (EIA) reported a sharp and unexpected drop in oil inventories for a second week in a row.

Light, sweet crude for December delivery rose as high as $96.24 a barrel in trading on New York's Nymex although the price later eased to $96.05l. In London, Brent crude futures surged to a new trading record of $91.63 a barrel, up $1.

Crude, in inflation-adjusted terms, has not been this expensive since 1980, when it was $38 a barrel.

Meanwhile, sterling rose 0.05 of a cent to $2.0795, having peaked at $2.08 earlier - its highest since May 1981 - after the Fed cut rates by a quarterpoint to 4.5% to boost economic growth. Themove followed September's half-point cut, leaving US rates well below the UK's 5.75%. The Bank of England is widely expected to vote for no change next week.

The strength of the pound is good news for the thousands of Brits heading across the Atlantic on shopping sprees before Christmas.

"Those who are planning to take winter breaks in the US will be pleased to find that their pound will go further towards their Christmas shopping, " said Abbey chief economist Barry Naisbitt.

"As with many things in economics, however, there is a balance to be struck. UK exporters looking to sell goods in the US will find that the stronger value of sterling could reduce their sales growth."

The euro also rose against the greenback in the wake of the Fed decision, touching $1.45, its highest since its 1999 debut.

However, the dollar recovered on hopes that its 1.6% decline against the euro over the past month was too fast. The Fed also signalled it may have finished cutting rates for now, warning: "The upside risks to inflation roughly balance the downside risks to growth". The euro was down 0.05 of a cent at $1.4465.

Concerns about the strength of the US economy have sent the dollar tumbling although the Fed has made it clear it will intervene to limit the impact of the housing crash.

The weak dollar and hopes that the US economy will not grind to a halt have offered some support to oil prices but the main drivers have been the rise in political tensions in Iran and Iraq and falling stockpiles in the US just as winter arrives.

US oil supplies fell by 3.9 million barrels last week although the consensus had been that there would be a 100,000-barrel increase.

The EIA also reported that refinery activity fell by 0.9 of a percentage points last week to 86.2% of capacity. Analysts had expected an increase of 0.5 of a point.

The high oil price is beginning to create turmoil in the Chinese economy. Beijing today reversed a policy of keeping fuel prices down, announcing increases of as much as 10% in an "urgent step" to help the nation's refiners cover surging costs.