Oil above $87 in Asia, at highest since early May

[November 05, 2010]  BANGKOK (AP) -- Oil jumped above $87 a barrel Friday in Asia, reaching its highest since early May, as the Federal Reserve's plan to buy $600 billion of Treasury bonds to stimulate the U.S. economy continued to send a tide of cash into stocks and commodities.

Benchmark crude for December delivery was up 37 cents at $86.86 a barrel at late afternoon Bangkok time in electronic trading on the New York Mercantile Exchange after earlier reaching $87.22. The contract climbed $1.80 to settle at $86.49 on Thursday.

The Fed's announcement Wednesday underlined expectations that the dollar would weaken further and push up prices for commodities including oil.

The strength of the dollar and the price of oil are closely linked. The dollar has been getting weaker against other currencies for weeks, ahead of the Fed decision and will probably fall further as more dollars pour into the economy.

Oil is priced in dollars and becomes cheaper for holders of foreign currency when the dollar falls. Europeans, for example, get more dollars for their euros and can buy more oil for fewer euros. Since oil is cheaper for them, they buy more, sending up the dollar price of oil.

Energy traders expect this to happen, so they buy oil when the dollar falls, boosting the effect.

When the dollar weakens, investors would rather hold hard assets like oil and other commodities because hard assets protect them against more weakening and inflation.

Oil prices hit a high for the year of $87.15 a barrel in early May, when U.S. gas prices were around $2.90 a gallon. They're heading back there again.

In other Nymex trading in December contracts, heating oil added 1 cent to $2.38 a gallon, gasoline gained 4 cents to $2.18 a gallon and natural gas was flat at $3.86 per 1,000 cubic feet.

In London, Brent crude climbed 36 cents to $88.36 a barrel on the ICE Futures exchange.

[Associated Press]

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