Oil Gains a Third Day on U.S.-Russia Tensions, Dollar Weakness

By Grant Smith and Christian Schmollinger

Aug. 21 (Bloomberg) -- Oil rose on speculation that Russian crude may be disrupted because of rising tensions with the U.S., and as the weaker dollar bolstered the hedging appeal of commodities.

U.S. plans for a missile shield in Poland will ``spur an arms race'' in Europe, Russia's Foreign Ministry said in a statement. About 1.1 million barrels of Caspian Sea crude remains shuttered following a pipeline fire in Turkey on Aug. 5. Russia's invasion of Georgia closed some export routes that could have been used to re-direct Caspian supplies to Europe.

``Geopolitical risk in oil-producing regions, as we're seeing with the tensions between the U.S. and Russia when the spare capacity buffer is low, is making prices volatile,'' said Thina Saltvedt, a Nordea Bank AB analyst in Oslo. ``Historically the correlation between oil and the dollar is high.''

Crude oil for October delivery rose as much as $2.69, or 2.3 percent, to $118.25 a barrel on the New York Mercantile Exchange and was trading at $117.94 at 12:54 p.m. in London. Futures are down 21 percent from a July 11 record of $147.27. Prices are 68 percent higher than a year ago.

The September contract expired yesterday after increasing 45 cents, or 0.4 percent, to settle at $114.98 a barrel.

``Supply constraints are still with us and even more evident when you look at events that are unfolding in Georgia, affecting countries such as Azerbaijan,'' Harry Tchilinguirian, senior oil analyst at BNP Paribas SA in London, said in an Bloomberg radio interview. ``The trend for demand is to remain strong in emerging markets over the next five years.''

Weaker Dollar

The U.S. currency fell against the euro, driving investors to dollar-priced assets like gold and crude. The dollar slipped to a one-week low of $1.4832 against the euro, and fell 1.3 percent to 108.61 yen, the biggest decline since July 15. Gold for immediate delivery gained as much as $3.93, or 0.5 percent, to $817.61 an ounce.

U.S. gasoline supplies fell 6.2 million barrels last week, the U.S. Energy Department said yesterday, more than double analysts' predictions. Analysts had predicted a 3 million-barrel decline, according to a Bloomberg survey.

Motor fuel demand was down 1.6 percent from last year's levels. Oil stockpiles rose 9.39 million barrels to 305.9 million barrels, the biggest gain since March 2001.

Brent crude oil for October settlement rose as much as $2.39, or 2.1 percent, to $116.75 a barrel on London's ICE Futures Europe exchange. It was at $116.60 a barrel at 12:53 p.m. London time. It rose $1.11, or 1 percent, to $114.36 a barrel yesterday.

To contact the reporter on this story: Christian Schmollinger in Singapore at christian.s@bloomberg.net; Grant Smith in London at gsmith52@bloomberg.net