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Business News/ Money / Oil jumps towards $79 after China vows flexible yuan
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Oil jumps towards $79 after China vows flexible yuan

Oil jumps towards $79 after China vows flexible yuan

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Singapore: Crude prices rose 2.2% on Monday to the highest since early May after China vowed to allow a flexible yuan exchange rate, raising expectations of higher petroleum imports by the world’s second-largest oil user.

US crude for July delivery climbed as much as $1.69 to $78.87, the highest since 6 May, and was up $1.66 at $78.84 at 1:27pm. Oil temporarily pared gains as did stock markets after China on Monday set the yuan mid-point unchanged from Friday, but rebounded as the spot exchange rate strengthened.

A stronger yuan against the greenback may render Chinese imports of dollar-denominated oil cheaper, fanning energy consumption in a country that burns about 10% of the world’s oil, analysts including Ben Westmore, from National Australia Bank said.

“China is important for the global oil market and an appreciating yuan is going to help fuel its imports," said Westmore.

“The natural implication of a re-valuation is that your import prices are falling. If you expect inflation to be kept under control, authorities won’t need to tighten and that will have a comparatively stimulatory impact on the domestic economy."

China announced on Saturday that it would resume making the yuan flexible, signalling that it was ready to break a 23-month-old peg to the dollar that had come under intense international criticism.

But in a lengthy statement about how currency reform would proceed, the central bank explicitly ruled out a one-off revaluation, and repeatedly said there was no basis for any big appreciation, adding that the yuan’s value was not far off its fair level.

The People’s Bank of China left the yuan’s mid-point unchanged on Monday from Friday before trading started, but it later allowed the spot yuan rate to jump to a 21-month high of 6.8154 against the dollar.

Japan’s Nikkei, Shanghai’s Composite Index and Hong Kong shares rose more than 2% on Monday. S&P futures had trimmed gains with news of the steady yuan mid-point, then rebounded.

“This week people will closely watch the mid-point at least until something else has more impact," said Clarence Chu, an energy trader at Hudson Capital Energy in Singapore.

“I would expect a small change this week, but not a significant change. It will be quite slow because it’s going to hurt their exports," added Chu.

August ICE Brent rose $1.64 on Monday to $79.86 a barrel on Monday, the highest price since 14 May.

US crude has recovered about 21% from a trough below $65 a month ago, but is still about $9 lower than the 2010 high.

“You are going to struggle to see oil break to the upside without a great deal of clarity about the euro situation yet," Westmore said, adding prices were unlikely to surpass their early-May 19-month peak above $87 before the end of the year.

Final Chinese commodity trade statistics for May, to be published later on Monday, were also in focus.

Analysts have said the yuan may strengthen about 5-10% over the year. When China raised the value of the currency in 2005 by 2.1%, commodities rallied for more than a year after the revaluation, although not solely because of Beijing’s move.

“The positive impact from a re-valuation will offset the adverse effect on the external sector," Westmore said. “The US economy is recovering faster than we thought three or four months ago."

A 3% gain of the yuan would have saved China some 56 billion yuan ($8.21 billion) on the nation’s commodity purchases.

“The news of the yuan is more important for metals than for crude because a larger proportion of metals flows into China," Westmore said.

Analysts have also said China’s move towards a flexible yuan was likely to be taken as a vote of confidence in the global economic recovery’s staying power.

World stocks gained for a ninth straight day on Friday on improved risk appetite after a Spanish bond auction eased fears about sovereign debt in Europe and helped the euro hold near three-week highs.

In a sign of normalisation, Wall Street’s fear gauge, the Volatility Index, tumbled below 24 on Friday after setting a 14-month high above 47 in May.

The oil market was also set to focus on this week’s US Federal Reserve’s Federal Open Market Committee (FOMC) two-day meeting on interest rates to June 23, seeking further evidence that low borrowing costs and other economic stimulus measures will remain in place for the rest of the year.

BP Plc estimates that a worst-case scenario rate for the Gulf of Mexico oil spill could be about 100,000 barrels of oil per day, according to an internal company document released on Sunday by a senior US congressional Democrat.

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Published: 21 Jun 2010, 01:20 PM IST
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