Oil Declines as Dollar Climbs, Reducing Appeal of Commodities

March 20 (Bloomberg) -- Crude oil fell from a three-month high as the dollar climbed against the euro, decreasing the appeal of commodities as an alternative investment.

Oil dropped as the dollar advanced from the weakest level in two months versus the euro. Commodities surged and the U.S. currency plunged earlier this week after the Federal Reserve said it will buy bonds to revive the economy. A government report showed that oil supplies rose last week as demand fell.

“We are back to moving on the dollar,” said Michael Lynch, president of Strategic Energy & Economic Research, in Winchester, Massachusetts. “The weak dollar helped spur the rally this week, and now that it’s regaining some strength, oil is lower. There’s also a realization that the market rose too far because any fall in inventories or increase in demand is well in the future.”

Crude oil for April delivery fell 55 cents, or 1.1 percent, to settle at $51.06 a barrel at 2:56 p.m. on the New York Mercantile Exchange. Oil touched $52.25 yesterday, the highest since Dec. 1. Prices rose 10 percent this week and are up 14 percent this year.

The April contract expired today. The more-active May futures contract rose 3 cents to $52.07 a barrel.

The dollar rose as some traders bet the slump this week, stoked by the Federal Reserve’s plan to start buying Treasuries, was overdone given the outlook for the U.S. economy.

The U.S. Dollar Index in New York, which tracks the currency against six others, was up 0.9 percent to 83.841 at 3:09 p.m. in New York, its first increase in nine days. The index trades on ICE Futures in New York. The dollar rose 0.8 percent to $1.3552 per euro from $1.3665 yesterday.

No Justification

“There isn’t justification for crude prices to stay above $50,” said Mike Wittner, head of oil research at Societe Generale SA in London. “We still have a weak economy; we still have weak demand.”

U.S. crude oil supplies rose 1.94 million barrels to 353.3 million barrels last week, an Energy Department report on March 18 showed. Stockpiles of gasoline and distillate fuel, a category that includes heating oil and diesel, also increased, the department’s report showed.

Fuel consumption dropped 0.6 percent last week to 18.8 million barrels a day, the lowest since the week ended Jan. 9, according to the department. Total daily fuel demand averaged over the past four weeks was 19.1 million barrels, down 3.2 percent from a year earlier.

Fifth Weekly Increase

Oil prices have increased for five consecutive weeks, the longest streak of increases in 11 months.

The Organization of Petroleum Exporting Countries deferred another production cut for at least 11 weeks at its March 15 meeting in Vienna. OPEC is scheduled to meet again on May 28.

OPEC has reduced daily output targets by 4.2 million barrels since September to prevent a supply glut. Members need to trim about 800,000 barrels a day to comply with the quotas that went into effect in January.

“When you consider where the market was a month ago, the changes are remarkable,” said Tim Evans, an energy analyst with Citi Futures Perspective in New York. “We were trading in the high $30s a month ago and are now in the low $50s. The primary reason for this change is that the OPEC production cuts are really making a difference.”

Brent crude oil for May settlement rose 55 cents, or 1.1 percent, to end the session at $51.22 a barrel on London’s ICE Futures Europe exchange.

Merrill Forecast

Merrill Lynch & Co. raised its forecast for 2009 Brent oil by $2 a barrel to $52 because of reduced supply from OPEC members and other producers, including Russia, Norway and Azerbaijan. Prices will also be supported by demand in emerging markets, analyst Francisco Blanch said in a report today.

Oil may decline next week on speculation that U.S. oil and fuel inventories will increase because the recession has curbed demand and as the stock market rally loses steam.

Seventeen of 33 analysts surveyed by Bloomberg News, or 52 percent, said futures will fall in the week ending March 27. Twelve respondents, or 36 percent, forecast oil prices will increase and four said that there will be little change.

Crude oil volume in electronic trading on the Nymex was 308,129 contracts as of 3:11 p.m. in New York. The market today headed for the lowest volume since Jan. 2. Volume totaled 565,401 contracts yesterday, 4.7 percent higher than the average over the past three months.

Open interest yesterday was 1.15 million contracts. The exchange has a one-business-day delay in reporting open interest and full volume data.