London: Oil hit a year-high above $79 a barrel on Monday, driven by bullish sentiment across financial markets, but later slipped back as traders questioned whether ample fuel supplies justified current price levels.
US crude for November delivery touched a session high of $79.05 in early trade, the strongest since October last year, before paring gains to $78.24 by 3:01pm down 29 cents from the previous close.
London Brent crude dipped 37 cents to $76.62.
“The gains were overwhelmingly driven by financials and market optimism rather than fundamentals,” said analyst Richard Gorry at JBC Energy in Vienna.
Crude oil prices have gained more than 10% since the start of October, spurred as they have been for much of this year by a weak US dollar and a wave of bullish sentiment across financial markets, interpreted by oil traders as indicative of stronger demand for fuel.
The US dollar is close to 14-month lows against the euro and edged lower against a basket of currencies on Monday. Commodities priced in dollars become cheaper to non-dollar investors as the US currency weakens, which has the effect of driving up the nominal oil price as investors move in.
MSCI’s benchmark all-country world stock index was up around half a percent early on Monday, recovering after investors were disappointed by from General Electric and Bank of America on Friday.
All the markets were expected to keep seeking direction from further company results this week.
But the oil market is also mindful fuel demand is only expected to recover gradually and that large volumes of oil, including of refined products, are surplus following the contraction in energy use triggered by financial crisis.
“Opec spare capacity has reached 6 million barrels per day, refining margins are depressed, OECD demand remains lacklustre and the world has yet to come to terms with the massive middle distillate stock surplus. Oil looks a little overblown at $79,” JBC’s Gorry said.
Oil stocks equate to around 62 days of forward demand, a number that the Organization of the Petroleum Exporting Countries once would have said was around 10 more than it would like.
At least some of the oil market’s gains have come from speculative flows, with money managers hiking net long crude oil positions on the New York Mercantile Exchange in the week to 13 October, the Commodity Futures Trading Commission said in a report on Friday.
Other support came from signs of economic strength in China, the world’s second biggest energy user after the United States.
A senior official from the National Development and Reform Commission said Chinese gross domestic product grew more than 7% in the first nine months of 2009.
For wider evidence of economic health, investors will scrutinise reports on September US housing starts for release on Tuesday and September existing home sales on Friday.