Oil rallies above $78 on news of yuan flexibility

I / Singapore June 21, 2010, 10:49 IST

Oil prices rallied in Asian trade today on expectations of higher demand from Chinese consumers after China's central bank said it would allow for a more flexible yuan.

A statement by the People's Bank of China on Saturday that it would "strengthen the flexibility" of the country's currency has also nudged Asian stock markets higher.

New York's main futures contract, light sweet crude for delivery in July, surged $1.01 to $78.19 a barrel in morning trade, while Brent North Sea crude for August advanced $1.08 to $79.30.

"Oil has been handcuffed to equities for sometime," said Victor Shum, a Singapore-based analyst with global energy consultancy Purvin and Gertz.

"Both oil and Asian stock markets are reacting to news over the weekend that China is likely to become more flexible with its currency against the US dollar," he told AFP.

An appreciating yuan is likely to increase the buying power of the Chinese consumer, allowing them to increase their exports to China."

Shum however said "some of this initial excitement may die down" as China has also explained that any appreciation of the yuan would be gradual.

Analysts have interpreted the Chinese central bank's statement as a sign that Beijing was ready to adjust the dollar peg in place for two years and allow the currency to rise.

China has effectively pegged the yuan at about 6.8 to the dollar since mid-2008 to prop up exporters during the world financial crisis.

But Beijing has come under mounting pressure ahead of next weekend's G20 summit in Toronto to allow the currency to strengthen.

Shum said the oil market has also been closely monitoring the weather conditions in the Gulf of Mexico region during the current Atlantic hurricane season, which can impact the oil pricing heavily.

The Gulf of Mexico supplies about 30 per cent of the energy needs of the United States.

"Given the still fragile state of the global economic recovery and the supply demand balance, the $70-80 range pricing for oil seems to be more sustainable than pricing above $80 or 85," Shum added.