Oil prices leap after rate cut, rally

NEW YORK — Oil prices bounded higher Tuesday after the Federal Reserve cut interest rates three-quarters of a percentage point and a rally on Wall Street raised energy investors' hopes for the economy.

Retail gas prices, meanwhile, slipped slightly for the second day in a row, while diesel prices rose further above $4 a gallon.

Oil was already higher, drawing support from the stock market's gains, when the Fed said it was lowering its key federal-funds rate as it tries to stave off a severe economic crisis. Many investors expected a full-point cut, but the Fed indicated it was concerned about higher inflation even as it was trying to shore up the economy.

Light, sweet crude for April delivery rose $3.74 to settle at $109.42 a barrel on the New York Mercantile Exchange.

In the past several months, rate cuts have fed oil-price rallies as investors have bought crude futures to hedge against inflation and the falling dollar. Also, oil futures are priced in dollars, which makes them cheaper for foreign investors as the greenback falls.

That has sent crude to a series of records in recent weeks despite rising supplies and forecasts calling for lower demand growth this year. Today, the Energy Department is expected to report that the nation's crude supplies grew last week.

"A weak dollar and the associated appeal of the oil as an inflation hedge and safe haven could continue to offset bearish fundamentals for a few more weeks," said Jim Ritterbusch, president of Ritterbusch and Associates, in Galena, Ill., in a research note.

On Monday, oil prices plunged by $4.53 a barrel on concerns that Bear's collapse was a sign of deeper economic problems.

Steve Bellino, senior vice president for energy at MF Global, agrees with many other analysts who think oil prices aren't supported by the market's underlying supply-and-demand fundamentals but thinks oil's Monday swoon was just a correction in a bull market rather than a sign market sentiment is turning.

"The market's run is not done yet," Bellino said.