Oil jumps above $78 as China lifts currency peg

[June 21, 2010]  MOSCOW (AP) -- Oil prices surged high above $78 a barrel Monday as China's move to end its two-year peg to the dollar boosted investor confidence in the global recovery and oil demand.

Benchmark crude for July delivery was up $1.46 to $78.64 a barrel Monday morning in London in electronic trading on the New York Mercantile Exchange. The contract gained 39 cents to settle at $77.18 on Friday.

China's exchange rate strengthened Monday while the central bank warned the value of the yuan would not dramatically rise due to the greater flexibility on its exchange rate.

Traders anticipate a stronger yuan will make dollar-based commodities such as oil cheaper in China and bolster demand. The policy shift also suggests China's officials believe its economy is growing enough to absorb any slowdown in exports a stronger currency may cause.

"The decision signals policymakers' confidence about China's economy and, to a lesser extent, the global recovery," Capital Economics said in a report. "This should be positive for commodities and equities both in China and the rest of the world."

Stocks in Europe jumped Monday morning as Britain's FTSE 100 added 1 percent while the Dow Jones benchmark was set to rise 1.2 percent on the open later on Monday.

The euro was up 0.2 percent to $1.2410 against the dollar.

Other observers noted that Monday's surge in oil prices does not have solid fundamentals behind it.

"The growth of Chinese crude oil demand is due to the increased refining capacity and that growth of crude oil demand will occur with or without a greater fluctuation in the yuan," trade advisory firm Petromatrix said in a note.

"Overall we are not yet convinced that the latest announcement on the yuan fluctuation will translate into a major change for the physical oil supply and demand, the impact potential being probably more in other commodities than in oil."

Oil has jumped from $64 a barrel on May 25 as fears have eased that Europe's debt crisis will brake global economic growth.

In other Nymex trading, heating oil rose 3.42 cents to $2.1631 a gallon, gasoline gained 3.25 cents to $2.1801 a gallon and natural gas jumped 10.2 cents to $5.099 per 1,000 cubic feet.

Brent crude was up $1.26 at $79.49 on the ICE futures exchange.

[Associated Press; By NATALIYA VASILYEVA]

Associated Press writer Alex Kennedy contributed to this report from Singapore.

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