Crude oil futures declined Monday morning, losing ground as traders feared last week’s strong economic data that pushed oil above $85 a barrel may also push the Federal Reserve closer toward eventually raising interest rates.

Light, sweet crude for June delivery declined 56 cents to $84.56 a barrel on the New York Mercantile Exchange. Brent crude on the ICE futures exchange reached a new 19-month high of $87.75 a barrel overnight, but retreated slightly to $86.87 a barrel, down 40 cents.

“Some of the economic shine from last week is wearing off a little bit,” said Phil Flynn, an oil market analyst at PFGBest in Chicago. “Because of the strong economic data, there is a growing concern that the Fed may have to think about raising rates, or maybe throw some cautionary language in their FOMC statement this week.”

The Federal Reserve’s Federal Open Market Committee meets on Tuesday and Wednesday to discuss interest rate policy and will issue a statement on Wednesday after its meeting.

Though the Fed’s goal is to stimulate the economy, by keeping interest rates close to zero during the recession, it also supports investments in riskier assets such as oil and other commodities. Thus, for oil, an improvement in economic data is a double-edged sword: on one side it means an improving economy and higher oil demand, and on the other, it brings the Fed closer to the day when the economy has improved enough to raise rates, which would hit oil prices.

The U.S. oil benchmark rose more than $2 a barrel last week, with its largest gain on Friday after the U.S. reported the largest year-over-year surge in new home sales in nearly five years and the durable-goods report showed strong purchases by businesses of capital equipment. Both are seen as a sign of a faster-than-expected pace of economic recovery in the U.S. and stronger future oil demand.

Oil’s decline Monday was slowed by support from gains in the U.S. and global equity markets, which continued to show momentum from last week’s strong economic data, and a positive earnings from U.S. manufacturers Caterpillar Inc. (CAT) and Whirlpool Corp. (WHR).

In its first-quarter report, Caterpillar said it expected oil prices to average $85 a barrel this year and for high prices to encourage increased production.

Strong global equity markets helped push Brent, the European oil benchmark, to a new high overnight, and Brent continues to trade above U.S. light, sweet crude due to a glut of U.S. oil supply in a key bottleneck in Cushing, Okla. The glut was also reflected in an about $2 per barrel discount of the June futures contract to the July contract, reflecting the market’s forecast that high supplies will depress prices for at least the short term.

Front-month May reformulated gasoline blendstock, or RBOB, recently traded down 0.38 cents at $2.3493 a gallon. May heating oil recently traded 0.35 cents lower at $2.2470 a gallon.

By Edward Welsch

Tags: business, economy, Federal Reserve, financial, financial markets, Global Economy, Global Recession, investors, oil prices

This entry was posted on Monday, April 26th, 2010 at 11:37 am and is filed under Dow Jones Industrial, Global Economy, Global Financial, Market Finance, US Finance, World Financial. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.