Oil Rises as Dollar Drop Spurs Investor Demand for Commodities

By Christian Schmollinger

May 22 (Bloomberg) -- Crude oil rose in New York, poised for a 9 percent gain this week, as investors bought commodity futures as a hedge against inflation as the dollar fell to a four-month low against the euro.

The dollar declined on speculation the U.S. government’s creditworthiness is weakening, sapping demand for the currency. Oil also climbed after an index of leading U.S. economic indicators rose 1 percent April, raising expectations of improved fuel demand.

“The trend is still to the upside,” said Jonathan Kornafel, a director for Asia at options traders Hudson Capital Energy in Singapore. “With the weakness in the dollar you don’t have a lot of other places for money to go so I think prices will push higher.”

Crude oil for July delivery rose as much as 59 cents, or 1 percent, to $61.64 a barrel in electronic trading on the New York Mercantile Exchange. It was at $61.62 a barrel at 9:47 a.m. in Singapore.

Yesterday, the contract declined 99 cents, or 1.6 percent, to settle at $61.05 a barrel. The oil price dropped after equities declined, raising concerns about the Standard & Poor’s 500 Index slipped 1.7 percent yesterday and the Dow Jones Industrial Average fell 1.5 percent.

Demand for commodities as an alternative investment increases as the dollar drops as oil and gold hold their value against the falling currency. The dollar declined to $1.3926 per euro as of 9:25 a.m. in Tokyo, after reaching $1.3941, the lowest since Jan. 5.

‘Underweight Oil’

“I think this was just a short-term pullback,” said Hudson Capital’s Kornafel. “You’ve still got some funds that are underweight oil and as the price rallies, they start to panic and they buy in and push the price up even more”

OPEC is likely to keep output quotas unchanged for a second time this year as recovering oil prices forestall the need for new supply cuts, according to a Bloomberg survey. The group will maintain a production target of 24.845 million barrels a day when it meets May 28, according to 25 of 27 analysts surveyed.

Brent crude for July settlement rose as much as 63 cents, or 1 percent, to $60.56 a barrel on London’s ICE Futures Europe exchange. It was at $60.55 a barrel at 9:48 a.m. Singapore time. The contract fell 66 cents, or 1.1 percent, to end the session at $59.93 a barrel yesterday.

To contact the reporter on this story: Christian Schmollinger in Singapore at christian.s@bloomberg.net