Oil prices rally on weak dollar

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World oil prices rallied Wednesday on the back of a weakening dollar, as traders shrugged off news of demand forecast downgrades from both the International Energy Agency and the OPEC oil cartel.

In midday London trade, Brent North Sea crude for delivery in November leapt $1.12 to $111.85 a barrel.

New York's main contract, light sweet crude for November, gained 59 cents to $86.40 a barrel.

"Crude oil prices extended gains and climbed higher, as the weaker US dollar provided strong support to the oil market," said Sucden brokers analyst Myrto Sokou.

The European single currency soared to a three-week dollar high on Wednesday as markets expected Slovakia to eventually back expansion of a eurozone bailout fund despite lawmakers voting against it.

The euro surged to $1.3816, the highest level since mid-September and compared with $1.3660 in New York on Tuesday.

A weaker greenback makes dollar-priced crude cheaper for buyers using stronger currencies. This tends to stimulate demand and support higher prices.

Slovakia's parliament on Tuesday blocked a plan to expand the European Financial Stability Facility (EFSF), dealing another blow to the eurozone's leaders as they look for a solution to the bloc's debt and banking crisis.

It effectively stops the expansion of the 440-billion-euro ($600 billion) bailout fund, despite warnings from European Central Bank chief Jean-Claude Trichet that the world financial system faces systemic dangers.

"Slovakia parliament voted no for the expansion of the EFSF, effectively vetoing the motion in the eurozone for the time being," Sokou said.

"However, the markets expect that there is a possibility of a re-vote, as part of a newly formed coalition government following the confidence motion attached to the last vote."

Oil traders are worried that the eurozone debt crisis could spread and help spark a fresh global economic downturn -- and a collapse in demand for energy.

The International Energy Agency on Wednesday again cut its oil demand estimates as the economic outlook darkens.

The IEA, which advises the developed countries on energy policy and developments, cut its oil demand estimate for 2012 by 210,000 barrels per day to 90.5 million bpd.

On Tuesday, the OPEC oil cartel cut its world demand forecasts for 2011 and 2012 for the third time in a row, citing uncertainty in the global economy and weaker demand from developing giants China and India.

© 2011 AFP

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