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OPEC caught in dollar crossfire

OPEC nations seeking higher oil prices to boost revenues may get their wish as the sliding dollar sees investment switch from the US currency and into crude and other commodities, according to analysts.

business Updated: Oct 17, 2010 13:31 IST

OPEC nations seeking higher oil prices to boost revenues may get their wish as the sliding dollar sees investment switch from the US currency and into crude and other commodities, according to analysts.

Yet higher commodity prices, which help to push up inflation, are also seen as a threat to the economic recovery.

The Organisation of Petroleum Exporting Countries, which pumps 40 per cent of world oil, chose last week to keep its official production target unchanged at a ministerial meeting in Vienna, home to the cartel's headquarters.

OPEC left its target at 24.84 million barrels a day --where it has stood since the start of 2009 -- claiming the market is well supplied amid risks to the economic recovery and against a backdrop of mainly steady oil prices.

Crude oil futures have traded between USD 70 and 80 for much of the past year but shot above USD 85 in recent days, helped by the tumbling dollar and data showing surprisingly strong global demand for energy.

The spike came as OPEC members Algeria, Libya and Venezuela said they wanted to see prices at USD 90-100 a barrel. "Because the dollar is getting eroded, the price of commodities, particularly food and wheat are high," Libya's OPEC official Shukri Ghanem said on the sidelines of the Vienna meeting.

"Subsequently we are losing on our real income. We like to see a higher price up to USD 100 ," added Ghanem, who is head of Libya's National Oil Company.

However, mindful that a spike in prices could harm global economic recovery, OPEC kingpin Saudi Arabia said it was satisfied with current crude price levels.

The dollar extended its free-fall against the euro and yen last week on growing expectations that the US Federal Reserve will pump out more new money to support flagging recovery in the world's biggest economy.

"A weaker US dollar is not without consequence as it erodes OPEC revenues in real terms and ends up tending to force higher oil prices and other commodity prices to compensate," said Neil MacKinnon, an economist at investment group VTB Capital.