Oil rallies above USD 78 on news of yuan flexibility | business | Hindustan Times
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Oil rallies above USD 78 on news of yuan flexibility

business Updated: Jun 21, 2010 13:14 IST

Oil prices rallied in Asian trade on Monday 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 said 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 USD 1.01 to USD 78.19 a barrel in morning trade, while Brent North Sea crude for August advanced USD 1.08 to USD 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 said.

"What this means to Asian economies is that the buying power of the Chinese consumer will likely increase as a result of the appreciating yuan, 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 Group of 20 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.

"If we get a hurricane, it could impact pricing severely," he said.

The Gulf of Mexico supplies about 30 per cent of the energy needs of the United States, the world's biggest economy.

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