Weaker US$ and strong demand lifts oil prices

London

OIL rose on Thursday, encouraged by a weaker US dollar and evidence of strong US fuel demand, though demand prospects remain clouded by the turmoil engulfing emerging markets and an escalation in the US trade dispute with China.

Emerging market stocks, bonds and currencies have plunged in recent weeks in response to financial crises in the likes of Turkey, South Africa and Venezuela.

The US dollar eased by about 0.2 per cent against a basket of major currencies on Thursday. But it has gained 3.3 per cent this year and has benefited from the flight out of emerging market assets. As a result, major oil consumers are finding their import bills rising quickly.

Brent crude futures were up 28 US cents at US$77.55 a barrel by 1253 GMT, still short of Tuesday's high near US$80. US futures rose 19 US cents to US$68.91.

"In the last week, we've seen the focus shift again from supply back to demand; and the continued calamity in emerging market stocks, bonds and currencies is weighing on the medium and longer-term demand outlook," said Saxo Bank senior manager Ole Hansen.

"We did see quite a lot of momentum last week, and then oil was shot down in flames after its failed attempt to break above US$80 . . . Now we have the extra dimension of a spike in oil prices that can only increase the pain (for consumers) and the risk of a slowdown in demand."

The market is already preparing for the loss of at least one million barrels per day (bpd) in Iranian crude supplies from early November, when US sanctions against Teheran come into force. The oil price has risen by 3 per cent since the US government announced the sanctions in May.

"The prospects of increased supplies from Opec (Organization of the Petroleum Exporting Countries) and her allies, and weaker demand from China and other emerging markets could weigh further on oil prices going forward, or at least limit the upside potential," said Fawad Razaqzada, analyst at futures brokerage Forex. "This is because of the US dollar's strength, weighing heavily on emerging market currencies, including the yuan, which in turn has pushed up the costs of all dollar-denominated commodities."

US crude stockpiles fell last week as strong consumption prompted refineries to boost output, data from the American Petroleum Institute showed on Wednesday. REUTERS