Crude Oil Is Steady After Rallying More Than $5 on Dollar Drop

Crude Oil Is Steady After Rallying More Than $5 on Dollar Drop

By Mark Shenk
June 6 (Bloomberg) -- Crude oil was little changed after rallyingmore than $5 yesterday as the dollar dropped against the euro onstatements that the European Central Bank may boost interest ratesto cut inflation.
The euro rebounded after ECB President Jean-Claude Trichet said thebank may raise rates next month. Investors looking to hedge againstthe dollar's falling value have helped lead oil, gold and corn torecords this year.
``A year ago there would have had to be a disruption or politicalevent to trigger a $5 move, but that's no longer the case,'' said Chip Hodge , a managing director at MFC Global Investment Management inBoston, who oversees a $4.5 billion energy-company bond portfolio.``The only rational reason is the falling dollar.''
Crude oil for July delivery rose 22 cents to $128.01 a barrel at8:35 a.m. Sydney time in after-hours trading on the New YorkMercantile Exchange. Futures reached a record $135.09 a barrel onMay 22 and are up 94 percent from a year earlier.
Yesterday, oil rose $5.49, or 4.5 percent, to $127.79 a barrel, thehighest close since May 28. It was the biggest one- day gain sinceMarch 26. Prices rose as much as $6.08 a barrel in after-hourselectronic trading.
``This huge move is attributed to the weaker dollar,'' said Nauman Barakat , senior vice president of global energy futures at MacquarieFutures USA Inc. in New York. ``If the Europeans decide to raiseinterest rates, the dollar will be back on skid row.''
Brent crude oil for July settlement rose $5.44, or 4.5 percent, tosettle at $127.54 a barrel yesterday on London's ICE Futures Europeexchange. It was the biggest single-day gain since Dec. 12. Pricesreached a record $135.14 on May 22.
Rate Policy
``It's not excluded that, after having carefully examined thesituation, that we could decide to move our rates for a smallamount at our next meeting,'' said Trichet at a press conference inFrankfurt after the ECB left its benchmark rate at 4 percent. ``Ididn't say it's certain. I said it's possible.''
ECB policy makers have not followed the Federal Reserve and theBank of England in cutting interest rates. Oil rose 52 percentsince Sept. 18 when the Fed began curbing rates to bolster aneconomy already reeling from a credit crisis. The Euro advanced 11percent against the dollar in the period.
``The moment Trichet opened his mouth we saw the dollar reversecourse and oil jump,'' said Phil Flynn , senior trader at Alaron Trading Corp. in Chicago. ``Monetarypolicy has been the primary driver of this market this year.''
The dollar traded at $1.5597 per euro at 6:06 a.m. in Tokyo, afterfalling 1 percent yesterday, the most since March.
Commodity Impact
``When the dollar is weak, commodities that are denominated in thedollar become less expensive to buy for those holding othercurrencies,'' said Peter Beutel , president of energy consultant Cameron Hanover Inc. in NewCanaan, Connecticut. ``As a result of this we have to pay more indollar terms to get the commodity that we need.''
Futures earlier dropped to $121.61 yesterday, the lowest since May15, amid falling demand and increasing supply of fuel in the U.S.,the country responsible for almost 25 percent of globalconsumption.
``The fundamentals don't support these prices,'' Hodge said.``Demand is starting to take a hit here in the U.S. Asian countriesare taking back subsidies, which will cut demand in thosecountries.''
India and Malaysia raised fuel prices this week, joining Indonesiaand Taiwan in moves that may cut Asian demand and slow globaloil-consumption growth.
Airline Pain
Continental Airlines Inc. will cut 3,000 jobs and shrink its jetfleet by 18 percent, becoming the fourth major U.S. carrier toslash payrolls and flights as soaring fuel prices push the industryto its worst losses since Sept. 11. United Airlines, thesecond-largest U.S. carrier, said June 4 it was shutting itslow-fare Ted brand and retiring 70 planes.
Raymond James Financial Inc. and Lehman Brothers Holdings Inc.raised their crude-oil price forecasts on June 2 on signs thatsupply growth will trail demand.
``I know that unless someone discovers a lot of oil, it can go to$150, $200'' a barrel, Jim Rogers , chairman of Rogers Holdings, said in a Bloomberg Televisioninterview. ``The facts are the world is running out of known oilreserves.''
To contact the reporter on this story: Mark Shenk in New York at mshenk1@bloomberg.net . Last Updated: June 5, 2008 18:37 EDT