Consultant says 'oil is a giant hedge against the dollar'

(NEW YORK) Investors who are flocking to the oil market may be exacerbating the US dollar's plunge and pushing oil prices to records, according to Cambridge Energy Research Associates here.

'What you have normally is the flight to dollars as a refuge, but today instead there is a flight to oil,' Cambridge Energy president Daniel Yergin said on Wednesday. 'It reflects not only a weakening of the dollar, but the expectation of further weakening. Oil is a giant hedge against the dollar.'

The dollar touched a record low of US$1.5324 per euro in midmorning in Europe on Wednesday. Oil prices hit a record high above US$105 in London on a weaker dollar, extending Tuesday's gains, which were also prompted by a drop in US oil inventories and Opec's decision to keep output unchanged.

The worst US housing market in over 25 years has contributed to a plunging dollar and has pushed investors to buy oil, which has held its value better than the dollar. The result has been US gasoline consumers being swept up in investors' flight to oil, Mr Yergin said.

'This is as much about the supply and demand of the dollar as it is about the supply and demand of oil,' he said. 'It's the credit crises refracted through the dollar to the oil market.'

Mr Yergin, the Pulitzer Prize-winning author of The Prize: The Epic Quest For Oil, Money and Power, said 'consumers are grappling with higher gasoline prices' as financial markets drive prices higher.

'That certainly does push the dollar down because the liquidity goes someplace,' University of Maryland economics professor Peter Morici said of the effect of oil investment on the dollar. 'The capacity of the US economy to absorb higher oil prices is greater than that of the EU,' he said. 'The falling dollar against the euro arbitrages that difference, so Europe effectively is not paying as much for oil.'

Cambridge Energy Research Associates, based in Cambridge, Massachusetts, advises international energy companies, governments and financial institutions on energy issues.

The average US pump price for regular gasoline rose 3.2 cents to US$3.162 a gallon on Monday, the government said. The price was 65.7 cents a gallon higher than a year ago.

Oil prices pushed above US$104 after Opec said it would not increase production, US fuel inventories declined and Venezuela sent tanks to its border with Colombia.

US Energy Secretary Samuel Bodman said that while the weakening dollar is a factor, 'of greater importance is the fact that we have seen a decline in global inventories'.

Nobuo Tanaka, head of the Paris-based International Energy Agency, said world stockpiles of oil will rise with Opec keeping supplies steady. 'We cut our demand forecast because of a relatively weak economy' worldwide, Mr Tanaka told reporters on Tuesday. 'At the same time, the level of stocks of inventories is still low and spare capacity is still low, so the buffer in the market is very narrow. That means the market reacts very harshly to geopolitical risks and speculation.'

Senator Byron Dorgan, a North Dakota Democrat, said at a hearing on Tuesday that speculators may be adding as much as US$50 to the price of oil, and he accused investment banks of hoarding the commodity. 'I am fairly well convinced that in the short term what we have is an unbelievable orgy of speculation,' he said.

Edward Morse, chief energy economist at Lehman Brothers Holdings Inc in New York, said he disagrees with 'the easy explanation that it's all financial players'. Oil at US$104 'does reflect a movement into commodities that is exacerbating the price signals', but there are supply constraints in commodities including probably oil, he said. -- Bloomberg, AP

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