Oil Rises as Dollar Drop Spurs Investor Demand for Commodities

May 22 (Bloomberg) -- Crude oil rose in New York, poised for a 9.1 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 68 cents, or 1.1 percent, to $61.73 a barrel in electronic trading on the New York Mercantile Exchange. It was at $61.52 a barrel at 3:15 p.m. in Singapore.

Yesterday, the contract declined 99 cents, or 1.6 percent, to settle at $61.05 a barrel. The oil price dropped along with equities, with the Standard & Poor’s 500 Index slipping 1.7 percent and the Dow Jones Industrial Average sinking 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 $1.3930 per euro as of 12:45 p.m. in Tokyo, after reaching $1.3955, the lowest since Jan. 5. Crude oil’s price has an 80 percent correlation with the decline in the dollar against the euro since the beginning of the year, according to Bloomberg data.

‘Underweight Oil’

“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,” said Hudson Capital’s Kornafel.

The Organization of Petroleum Exporting Countries may 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.

“The global economy isn’t very good right now and that is not a situation for OPEC to cut production,” said Ken Hasegawa, a commodity derivative sales manager at brokers Newedge in Tokyo. “They have to keep the levels at the moment.”

OPEC agreed last year to three production cuts to bolster prices.

Nigeria Output

Nigeria’s oil production has fallen to less than half its capacity as fighting against rebels in the Niger River delta escalates.

The West African nation, formerly the continent’s biggest producer, now pumps about 1.6 million barrels a day, compared with capacity of 3.2 million, Petroleum Minister of State Odein Ajumogobia said yesterday.

“This kind of situation is not that special,” said Newedge’s Hasegawa. “This is the same issue that’s been there and it’s always supportive.”

Brent crude for July settlement rose as much as 71 cents, or 1.2 percent, to $60.64 a barrel on London’s ICE Futures Europe exchange. It was at $60.45 a barrel at 3:16 p.m. Singapore time.

Crude oil futures may decline as the global economic contraction reduces fuel demand in the U.S., Europe and Japan.

Fifteen of 36 analysts surveyed by Bloomberg News, or 42 percent, said futures will fall through May 29. Fourteen respondents, or 39 percent, forecast that oil prices will rise and seven said the market will be little changed. Last week, 60 percent of analysts said prices would decline.

Investigators of the fire at Sunoco Inc.’s Marcus Hook, Pennsylvania, refinery on May 17 couldn’t fully access the site because of safety issues as operations are at reduced rates.

The cat cracker remains shut and crude units are “still at reduced rates,” Thomas Golembeski, a Sunoco spokesman, said in an e-mail yesterday.