Crude Oil Caps Biggest Monthly Gain Since 1999 on Dollar Drop

May 29 (Bloomberg) -- Crude oil rose, capping its biggest monthly gain in a decade, as the dollar weakened against the euro, bolstering the appeal of commodities.

Oil climbed above $66 a barrel to a six-month high as the dollar declined beyond $1.41 against the euro for the first time this year, making raw materials such as oil and gold an attractive alternative investment. Prices also gained as U.S., and Asian indicators pointed to a global economic recovery.

“The devaluation of the dollar is leading to the revaluation of energy and commodities in general,” said John Kilduff, senior vice president of energy at MF Global in New York. “This is a monetary-based rally. The market is focused on the future and ignoring the fundamentals of the present day crude-oil supply and demand picture.”

Crude oil for July delivery rose $1.23, or 1.9 percent, to $66.31 a barrel at 2:59 p.m. on the New York Mercantile Exchange, the highest settlement since Nov. 4. Oil advanced 30 percent in May, the biggest monthly increase since March 1999, when Asia was recovering from the 1997-1998 financial crisis. Prices climbed 7.5 percent this week and 49 percent this year.

The U.S. currency had its biggest monthly decline against the euro this year. The dollar dropped 1.4 percent to $1.4134 versus the single European currency.

Commodities are heading for the biggest monthly rally in 34 years, led by energy futures. In May, the Reuters/Jefferies CRB Index of 19 energy, metal and agricultural prices has gained 13 percent, the most since July 1974. The index is up 1.3 percent to 253.05 today, the highest since Nov. 10.

Consumer Confidence

Confidence among U.S. consumers rose this month to the highest level since September. The Reuters/University of Michigan final index of consumer sentiment increased to 68.7, more than forecast, from 65.1 in April.

“This rally is based more on hope than on fact,” said Adam Sieminski, the chief energy economist at Deutsche Bank AG in Washington. “The move has been more tied to rising consumer sentiment than market fundamentals.”

The U.S. Commerce Department reported that gross domestic product shrank at a 5.7 percent annual rate during the first quarter, compared with an initial 6.1 percent estimate, capping its worst six-month performance in five decades.

India, Asia’s third-largest economy, expanded 5.8 percent in the three months to March 31, led by government spending and construction, the statistics office in New Delhi said today. Economists were expecting a 5 percent increase.

Japan’s factory production last month climbed 5.2 percent from March, the Trade Ministry said today in Tokyo. Companies said they planned to increase output in May and June as well, the report showed. Japan is the world’s second-biggest economy and the third-biggest oil consumer.

Lower Supplies

Prices are also rising because of declining U.S. inventories. Crude-oil supplies fell 5.41 million barrels to 363.1 million last week, an Energy Department report showed yesterday. It was the biggest decrease since September. The drop left inventories 27 percent greater than the five-year average, up from a 23 percent surplus a week earlier.

U.S. gasoline stockpiles dropped 537,000 barrels to 203.4 million last week, the lowest since December, according to the report.

Gasoline for June delivery rose 2.05 cents, or 1.1 percent, to end the session at $1.931 a gallon in New York, the highest settlement since Oct. 9.

The Organization of Petroleum Exporting Countries predicted stronger demand as it decided yesterday to keep output quotas unchanged. OPEC agreed at three meetings last year that the 11 members with production quotas would reduce output by 4.2 million barrels a day.

‘Prices Are Good’

Saudi Arabian Oil Minister Ali al-Naimi said OPEC opted not to alter its output targets because “prices are good, the market is in good shape.”

Oil’s rally is driven by improving sentiment about the global economy and isn’t supported by demand, OPEC Secretary General Abdalla el-Badri said today. Global crude stockpiles remain very high, El-Badri told reporters at a briefing in Vienna. Still, prices may reach $70 to $75 a barrel by the end of the year, partly because speculators are returning to commodity markets, he said.

OPEC, the International Energy Agency and Energy Department cut their projections for global crude-oil demand this month.

“The drop in U.S. inventories is evidence that the OPEC production cuts are starting to bite,” said Michael Lynch, president of Strategic Energy & Economic Research, in Winchester, Massachusetts. “There’s some optimism about the economy, which is driving the oil market. It’s important to keep in mind that demand has shown absolutely no sign of recovery.”

Brent Oil

Brent crude for July settlement rose $1.13, or 1.8 percent, to end the session at $65.52 a barrel on London’s ICE Futures Europe exchange. It was the highest settlement since Nov. 4.

Crude oil volume in electronic trading on the Nymex was 359,775 contracts as of 3:11 p.m. in New York. Volume totaled 501,771 contracts yesterday, 0.6 percent higher than the average over the past three months. Open interest was 1.12 million contracts. The exchange has a one-business-day delay in reporting open interest and full volume data.