LONDON: Further falls in the sickly dollar’s value could keep oil prices bubbling this year, spurring fresh moves by hedge funds into commodities markets and reinforcing the OPEC cartel’sdetermination to hold levels firm, analysts said.
The dollar-oil relationship emerged as a central feature of the energy market in 2003 as speculative funds fled the dollar on concern over a booming US current account deficit and piled into commodity markets such as oil.
The dollar hit a new record low yesterday against the euro after falling around 17 per cent last year. In contrast, US oil futures rose 19 per cent over 2003 to post their highest yearly average in more than two decades.
“That’s definitely a play that’s going on,?said Nauman Barakat, senior vice president at Refco brokerage. “I think this (the weak dollar) is key to why these prices are so strong,?he said.
Early yesterday, US prices were 33 cents firmer at US$32.85 a barrel. Some analysts say any price link between oil and the dollar is psychological rather than based in fact.
“Examining data back to 1990, the relationship between daily exchange rates and WTI (US light crude) prices indicates that any correlation between the two is minimal at best as the volatility in daily crude prices… is more than twice the volatility in foreign exchange markets,?Goldman Sachs, one of the biggest players among investment funds, has said.
Even so, oil traders?focus on the dollar has strengthened in the last month as the Organization of the Petroleum Exporting Countries (OPEC) said they needed higher prices for their dollar-denominated sales to make up for the currency’s lower purchasing power.
“For producers, the dollar’s sliding trend is a cause of concern as some member countries have strong trade links with Eurozone countries. The dollar’s continued move downward against the euro will only further undermine the purchasing power of the barrel,” OPEC said.
OPEC has made no move to cool prices by raising supply even though its reference crude price has been well above its US$22-28 target range for most of the last three months and averaged US$28.10 a barrel for 2003. Instead, ministers are talking about cutting supply at next month’s meeting to keep prices up.
“It’s possible the dollar’s weakness leaves funds believing in a more substantial move to the upside. It may have left funds with a higher price objective before they start selling,?one London-based trader said of the dollar’s weakness.
Oil is not the only commodity to have rocketed up as investment funds charge in. Gold yesterday hit its highest level in 14 years, while silver hit 5-1/2 year highs.
Most analysts hold out little hope for a swift dollar rebound as 45-year low US interest rates and continued security concerns deter investment.
But in the admittedly unlikely event of co-ordinated central bank intervention to prop up the dollar, oil prices could fall fast, they say.
