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Dollar, Not Demand, Driving Oil Price Now

Friday, 05 November 2010 09:09 AM

Oil traded near its highest level in two years in New York as the dollar headed for a weekly decline against most major counterparts after the Federal Reserve’s decision to purchase more debt to boost the U.S. economy.
Crude’s 6.6 percent rally this week, driven by the dollar’s decline, may be about to end, according to a technical indicator used by traders. The U.S. currency has fallen versus all but one of its 16 most-traded peers since the Fed said Nov. 3 it will buy about $75 billion of Treasuries every month through June.
“Underlying demand in the industrialized world is still not enough to justify these price levels,” said Eugen Weinberg, head of commodity research at Commerzbank AG. “But market sentiment is so strong that if the weakness of the dollar persists I couldn’t rule out higher prices.”
Oil for December delivery traded at $86.83 a barrel, up 34 cents, in electronic trading on the New York Mercantile Exchange at 12:51 p.m. London time. The contract earlier rose to $87.22, the highest price since Oct. 9, 2008. Brent crude for December settlement rose 16 cents to $88.16 after advancing to $88.80 a barrel on the ICE Futures Europe exchange in London.
Futures advanced after a U.S. government report showed payrolls rose more than forecast in October. Payrolls climbed 151,000, exceeding the median estimate of economists surveyed by Bloomberg News and following a revised 41,000 drop the prior month that was smaller than initially estimated, Labor Department figures showed today in Washington. The jobless rate held at 9.6 percent, in line with forecasts.
Relative Strength Index
Crude’s relative strength index, a measure of how rapidly prices advance or drop in a specific period, signals that the rally may be close to dissipating. The 14-day RSI was last at 67.68. A reading of 70 and above is often interpreted as a sign that prices are “overbought” and ready to decline.
Expectations for gains in crude have increased on speculation the Fed’s stimulus program will weaken the U.S. currency as economic growth accelerates, boosting the allure of raw materials, which are priced in dollars.
The dollar has lost 1.2 percent versus the euro this week, trading as low as $1.4282 yesterday, the weakest level since Jan. 20. It has depreciated 2.5 percent against the Swiss franc and 1.1 percent compared with the pound.
JPMorgan Chase & Co. raised its average 2011 forecast for New York-traded crude to $89.75 a barrel from $82.50, following the Fed’s announcement of additional asset purchases, or quantitative easing.
“Quantitative easing and the comments from the Saudi oil minister were definitely the game-changers,” according to Weinberg at Commerzbank.
Saudi Arabia’s Oil Minister Ali Al-Naimi said on Nov. 1 that a range between $70 and $90 a barrel is satisfactory for consumers. The kingdom had previously indicated a preferred target of $75 a barrel.
Prices may climb to $100 or more next year for the first time since the 2008 financial crisis as central banks pump cash into economies to revive growth, JPMorgan and Bank of America Merrill Lynch said this week.
Investors should bet on gains in stocks rather than oil as the Federal Reserve’s decision to extend its economic stimulus program weakens the dollar, boosting the price of crude, according to Petromatrix GmbH.
The Fed’s quantitative easing measures are “better played in equities than in oil futures,” Olivier Jakob, managing director of Petromatrix in Zug, Switzerland, wrote in a report received today. “Unresolved unemployment and rising oil prices are not a positive for oil demand.”
OPEC Demand Outlook
The Organization of Petroleum Exporting Countries upgraded its estimates for global oil consumption through 2014, citing growth in Asia. Demand will increase 5.1 percent to 89.9 million barrels a day by 2014 from this year, 800,000 barrels a day more than in last year’s forecast, OPEC said yesterday in its annual outlook. Still, the 12-member group, which pumps 40 percent of the world’s crude, is happy with prices of $70 to $85 a barrel, Secretary-General Abdulla El-Badri said yesterday in Vienna.
“I don’t think we’ll see $100 oil in 2011,” el-Badri said. The global economic recovery won’t be jeopardized if oil rises to $90 a barrel, he said.
Commercially held crude inventories increased 1.95 million barrels last week to 368.2 million, as refiners cut operating rates to the lowest since March, the Energy Department in Washington said on Nov. 3. Supplies were forecast to gain 1.5 million, according to the median estimate from 17 analysts surveyed by Bloomberg News.
Crude may still increase next week on the dollar’s weakness, a Bloomberg News survey showed. Twenty-nine of 49 analysts and traders, or 59 percent, said oil will rise through Nov. 12. Thirteen respondents, or 27 percent, predicted prices will fall and seven estimate there would be little change. Last week, 54 percent of respondents said futures would decline.
U.S. gasoline stockpiles fell last week as imports from Europe dwindled after strikes in France shut refineries, cutting the profit from shipping the fuel from Europe to a 20-month low. Inventories were 164.9 million barrels, the lowest level in almost a year, according to the Energy Department.

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Oil traded near its highest level in two years in New York as the dollar headed for a weekly decline against most major counterparts after the Federal Reserve s decision to purchase more debt to boost the U.S. economy. Crude s 6.6 percent rally this week, driven by the...
Friday, 05 November 2010 09:09 AM
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