Oil Prices Rise

Crude prices rose 1.4 percent today to the highest levels since mid May after China vowed to allow a flexible yuan exchange rate, raising expectations of higher crude imports by the world's No. 2 oil user.

US crude for July delivery rose as much as US$1.09 to US$78.27, the highest since May 10. It temporarily pared gains as did stock markets after China on Monday set the yuan mid-point unchanged from Friday, and was up 97 cents at US$78.15 at 0204 GMT.

A stronger yuan against the greenback may render Chinese imports of dollar-denominated oil cheaper, fanning energy consumption, analysts including Ben Westmore, from National Australia Bank said.

"China is important for the global oil market and an appreciating yuan is going to help fuel its imports," said Westmore.

"The natural implication of a re-valuation is that your import prices are falling. If you expect inflation to be kept under control, authorities won't need to tighten and that will have a comparatively stimulatory impact on the domestic economy."

China announced on Saturday that it would resume making the yuan flexible, signalling that it was ready to break a 23-month-old peg to the dollar that had come under intense international criticism.

But in a lengthy statement about how reform would proceed, the central bank explicitly ruled out a one-off revaluation, repeatedly said there was no basis for any big appreciation and added that the currency's value was not far off its fair level.

"You are going to struggle to see oil break to the upside without a great deal of clarity about the euro situation yet," Westmore said, adding prices were unlikely to surpass their early-May 19-month peak above US$87 before the end of the year.

US crude has recovered about 21 percent from a trough below US$65 a month ago, but is still US$9 lower than the 2010 peak.

ICE Brent crude for August rose as much as US$1.17 to US$79.39 a barrel on Monday, the highest price since May 14, and was up US$1.11 at US$79.33.

YUAN'S WIDE IMPACT

"The positive impact from a re-valuation will offset the adverse effect on the external sector," Westmore said. "The US economy is recovering faster than we thought three or four months ago."

Final Chinese commodity trade statistics for May, to be published later on Monday, were also in focus.

"The news of the yuan is more important for metals than for crude because a larger proportion of metals flows into China," Westmore said.

Global stocks, commodity-linked currencies and other higher-yielding currencies may receive an immediate boost this week in response to China's decision on the yuan.

Japan's Nikkei average powered to a one-month high on Monday, but Shanghai's Composite Index opened up a marginal 0.2 percent and S&P futures trimmed gains after the yuan's mid-point was left unchanged from Friday.

Analysts have also said China's move towards a flexible yuan was likely to be taken as a vote of confidence in the global economic recovery's staying power.

World stocks gained for a ninth straight day on Friday on improved risk appetite after a Spanish bond auction eased fears about sovereign debt in Europe and helped the euro hold near three-week highs.

In a sign of normalisation, Wall Street's fear gauge, the Volatility Index, tumbled below 24 on Friday after setting a 14-month high above 47 in May.

The oil market was also set to focus on this week's US Federal Reserve's Federal Open Market Committee (FOMC) two-day meeting on interest rates to June 23, seeking further evidence that low borrowing costs and other economic stimulus measures will remain in place for the rest of the year.

BP estimates that a worst-case scenario rate for the Gulf of Mexico oil spill could be about 100,000 barrels of oil per day, according to an internal company document released on Sunday by a senior US congressional Democrat.

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