Crude hovers below $86 as dollar tempers China-fed rally

London: Oil prices hovered below $86 a barrel yesterday as strength in the dollar tempered an early rally after news of surging growth in the world's number two oil consumer China.

The dollar index strengthened by 0.4 per cent yesterday, recovering from earlier losses triggered after the strong Chinese economic data ramped up speculation of a yuan revaluation, which is seen as negative for the dollar.

Oil tends to fall as the dollar rises as it makes commodities more expensive for buyers using other currencies.

Still, prices traded within $2 of 18-month highs struck earlier this month as surging economic growth in China boosted expectations for demand. China's economy grew 11.9 per cent in January-March — the fastest quarterly growth since 2007.

The scorching growth raises the prospect of further yuan appreciation, in a move thought to be bullish for oil as it could improve China's buying power of dollar-denominated currencies.

Front-month US crude fell 32 cents to $85.52 a barrel at 0913 GMT after closing higher the previous day and within sight of the 18-month high of $87.09 a barrel hit on April 6. ICE Brent crude rose 10 cents to $86.25 a barrel by the same time.

Support

"We are looking at the data from China and this is very supportive for the market," said Christophe Barret, oil analyst at Credit Agricole Corporate and Investment Bank. "But I think the growth was anticipated and was already in the prices."

Oil prices rose more than 2 per cent in the previous session, ending a five-day losing streak after US government data showed a surprise 2.2 million barrel drop in US crude stocks on Wednesday.

But the report also showed a larger-than-expected 1.1 million barrel rise in distillate stocks including diesel, raising questions about the pace of the US exit from recession.

"The demand side is going to get more attention with the macro data coming out of the big consuming countries. Non-OECD demand, especially from China and other East Asian countries, has been very strong and the market is waiting for North America to catch up," said Ben Westmore, a commodities analyst at the National Australia Bank.

The Organisation of Petroleum Exporting Countries (Opec), in its monthly report, said economic optimism was driving prices and that it saw a "very comfortable outlook" for oil fundamentals. The group also nudged up its forecast for 2010 oil demand growth.

But for some analysts, prices near $85 a barrel could erode demand in developed markets and prompt consumer switching to cleaner fuels. "If prices remain at these levels for long, they will have a strong impact on demand," said Barret.

Later yesterday, investors were likely to watch data on weekly US jobless benefit claims for further clues on the pace of recovery.

On a technical basis, prices were due for a small correction later yesterday but upward momentum is set to stay intact.