Oil prices rally after Chinese move on yuan

21st June 2010, Comments 0 comments

Oil prices rallied towards 80 dollars on Monday on expectations that demand in China will rise after the nation's central bank said it would allow the yuan more freedom of movement.

New York's main futures contract, light sweet crude for delivery in July, also advanced 1.32 cents to 78.50 dollars a barrel.

Brent North Sea crude for August delivery rose 1.32 dollars to 79.54 dollars per barrel in midday deals.

The news also helped push gold to a record high price of 1,265 dollars an ounce in London, with the precious metal also boosted by eurozone debt crisis concerns.

Over the weekend, the People's Bank of China said it would "strengthen the flexibility" of the country's currency, sparking a massive global stock market rally on Monday.

"Oil has been handcuffed to equities for some time," said Victor Shum, a Singapore-based analyst with global energy consultancy Purvin and Gertz.

"Both oil and Asian stock markets are reacting to news over the weekend that China is likely to become more flexible with its currency against the US dollar," he told AFP.

"What this means to Asian economies is that the buying power of the Chinese consumer will likely increase as a result of the appreciating yuan, allowing them to increase their exports to China."

Shum however said "some of this initial excitement may die down" as China has also explained that any appreciation of the yuan would be gradual.

Analysts have interpreted the Chinese central bank's statement as a sign that Beijing was ready to adjust the dollar peg, which has been in place for two years. and allow the currency to rise.

China has effectively pegged the yuan at about 6.8 to the dollar since mid-2008 to prop up exporters during the world financial crisis.

But Beijing has come under mounting pressure ahead of next weekend's Group of 20 summit in Toronto to allow the currency to strengthen.

Shum said the oil market has also been closely monitoring the weather conditions in the Gulf of Mexico region during the current Atlantic hurricane season.

"If we get a hurricane, it could impact pricing severely," he said.

The Gulf of Mexico supplies about 30 percent of the energy needs of the United States, the world's biggest economy.

"Given the still fragile state of the global economic recovery and the supply demand balance, the 70-80 dollar range pricing for oil seems to be more sustainable than pricing above 80 or 85 dollars," Shum added.


© 2010 AFP

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