Oil eases towards $81 on economy caution

Oil eases towards $81 on economy caution

London: Oil prices edged lower on Friday, back towards $81 a barrel, as scepticism economic recovery was robust enough to spur a convincing rise in fuel demand curbed appetite to extend this week’s powerful rally.

US crude futures have rallied by around $10 a barrel this month and hit a year-high of $82 a barrel earlier this week, partly driven by a wave of positive corporate earnings.

Economic data has also provided some evidence of financial recovery and weekly government data showed a decrease in US stores of gasoline, but overall fuel inventories are still much higher than a year ago.

“If you go through the corporate earnings results, the top line is still suggesting it’s a difficult environment for improving sales," said analyst Jane Foley of FOREX.com.

“Whilst we are in an economic recovery phase, the recovery will be difficult."

US crude for December fell five cents to $81.14 by 4:30pm, while London Brent crude gained three cents to $79.54 a barrel.

While the price of oil has risen sharply in dollar terms, measured in other currencies its performance is more modest.

Against the euro, the dollar touched a new low for the year after the euro breached the psychologically important $1.50 mark.

The dollar’s weakness has been cited as a major factor in an oil rally that has pulled prices off a low of little more than $30 a barrel in December last year, not least because dollar-denominated oil is cheaper for non-dollar investors.

They have also moved out of the dollar and into riskier assets such as oil and equities as a limited return of confidence in the global economy has taken away the appeal of the world’s central reserve currency as a relatively safe haven.

Oil producing countries that have large dollar reserves and receive income in petrodollars have voiced concern about dollar weakness and the speculation it can lure into oil markets.

They do not object to a certain level of speculation, but are nervous it could get out of control as they say it did when oil prices hit a record of nearly $150 a barrel in July last year, with the effect of destroying oil demand.

Opec secretary general Abdullah al-Badri said this week oil prices at around $80 were “a bit high" given the state of the world’s economy.

He said the Organization of the Petroleum Exporting Countries could consider raising output targets when it next met in December, but only if inventories shrank and there was “real economic growth".

Some analysts predict prices will continue to rise.

“We believe that the dollar might get a bit weaker, we’ll have strong equities, relatively favourable economic data. So even if there is a risk of a short term correction, oil has got a bit further to go this year," Christine Schweikert, analyst at Germany’s BHF-Bank, said on Reuters Television. But whether Badri’s conditions for an OPEC output increase will be met remains to be seen.

Data on Friday showed Britain’s economy shrank in the third quarter.

Figures from France and Germany were more positive as German manufacturing returned to growth and French consumer spending rose.