London: Oil rose over $1 on Tuesday with Brent crude above $116 a barrel as the dollar weakened on improved prospects for a bailout for heavily indebted Greece, but oil remained on track for an overall fall in May.
The euro rose to a three-week high against the dollar as the European Union raced to draft a second bailout package to release loans next month for Greece, and the Wall Street Journal reported that Germany could make concessions on efforts to put together a bailout.
Brent crude futures were up $1.72 a barrel to $116.40 at 3:26pm, and US crude was up $1.75 a barrel to $102.34. London and New York were closed on Monday for public holidays.
“The weaker dollar is the main reason why oil prices are up this morning, on hopes that an aid package for Greece will be struck,” said Carsten Fritsch, an analyst at Commerzbank in Frankfurt.
The dollar was down 0.57% against a basket of currencies at 3:26pm. A weaker dollar makes oil cheaper for those holding other currencies.
Fritsch also suggested that US crude had gained support from the temporary closure of the 591,000 barrel a day Keystone pipeline, which carries oil from Alberta to US oil hub Cushing.
In a similar vein, Brent is being supported due to production problems in the North Sea which is disrupting the Forties programme.
Despite the rally as traders returned to their desks, both oil contracts are still down for the month of May.
The market’s focus is now turning to the upcoming Opec meeting in Vienna in June. Analysts such as JBC Energy believe an increase in output allocations of 2-2.5 million barrels per day would be appropriate given the current fundamental situation.
“Nevertheless, the outcome of the meeting will once again depend strongly on Opec kingpin Saudi Arabia’s stance on the issue, with the Middle Eastern country holding some three quarters of the group’s idle capacity,” it said in a note.
Brent and US crude oil drew support from the ending of a tenuous truce between tribal groups and forces loyal to Yemen’s President Ali Abdullah Saleh, bringing the country closer to civil war.
Fritsch said the unrest in the Middle East was still important for the oil market but there was nothing really new in this. “It’s providing continued support to oil prices and protection to the downside,” he said.
Yemen’s Saleh has refused to step down despite efforts by regional nations to broker a departure amid widespread protests, causing concern that unrest may spill into neighbouring states.
“The situation in Yemen seems to be deteriorating. The problem with Yemen is that it is next to Saudi Arabia, and it has been a source of terrorist attacks against Saudi Arabia,” said Tony Nunan, a Tokyo-based risk manager at Mitsubishi Corp.
“As for Libya, unless there is a big breakthrough such as (Moammar) Gadhafi stepping down, Libya is going to be out (of the oil export business) for a while. That would continue to be a bullish factor.”
South African President Jacob Zuma made little headway towards brokering a Libya peace deal in talks with Gaddafi on Monday as eight army officers became the latest senior figures to break with the Libyan leader.
Nato warplanes have stepped up air strikes on Tripoli, with Gadhafi’s Bab al-Aziziyah compound in the centre of the city being hit repeatedly.
In Japan, manufacturers projected May output would rise 8% compared with the previous 2.7% forecast, data from the Ministry of Economy, Trade and Industry showed on Tuesday.
Companies expect the post-quake recovery to continue in June with production seen rising a further 7.7%, in a sign they are making headway in restoring supply chains and production lines.