Oil holds below $79 as dollar firms

Wednesday, November 18, 2009
LONDON: Oil held below $79 a barrel on Tuesday, giving up some of the previous session’s rally, as the US dollar rose and a weekly US inventory report was expected to show higher crude stocks.

US industrial production data on Tuesday suggested the economy was still soft, which has bearish implications for energy use in the world’s biggest oil consumer.

Production rose by a smaller-than-expected 0.1 per cent in October, Federal Reserve data showed on Tuesday, as auto manufacturers scaled back following the end of the “cash for clunkers” incentive.

The market had rallied on Monday spurred by a weaker dollar and as better-than-expected US consumer spending data buoyed hopes of energy demand recovery in the world’s largest oil consumer.

US crude for December delivery fell 33 cents to $78.57 a barrel by 1428 GMT. The contract settled $2.55 higher at $78.90 on Monday. Brent crude fell 44 cents to $78.32.

“A stronger dollar is not helpful for oil’s outlook in the short term,” said Carsten Fritsch, analyst at Commerzbank, adding that $80 a barrel was strong resistance for crude.

“Oil has struggled to overcome this level for the last two or three weeks,” he said.

Gold also fell as investors locked in gains from a strong rally to a record high, while the dollar edged higher from its 15-month lows. European stocks slipped and US equities opened lower.

Expectations that the Federal Reserve would keep interest rates near zero for some time had been weighing on the dollar, fuelling gains in dollar-priced raw materials and related commodity shares.

US oil inventory data from industry group the American Petroleum Institute is due later on Tuesday and the government’s figures follow on Wednesday. According to a preliminary Reuters’ poll, crude inventories probably rose.

Oil has rallied from below $33 last December even though global demand fell year-on-year for the first nine months of 2009 according to the International Energy Agency and demand in wealthy countries has not improved much.

Still, some analysts expect demand strength from emerging markets to more than compensate, leading to higher fuel consumption down the road.

“The market is increasingly expecting EM (emerging markets) demand to crowd out future OECD demand growth, and is putting upward pressure on long-dated prices, leaving the market in a new higher trading range of $75 to $82,” Goldman Sachs said in a report.