Oil Prices Rise on China Currency Change

VIENNA, Austria – Oil prices climbed by more than $1 a barrel Friday, one day after China’s decision to abandon its currency peg to the U.S. dollar, making oil prices cheaper for China, the world’s second-largest consumer of crude.

The renewed terror attacks on London’s public transit system led to some nervousness on the markets. But Thursday’s attacks were much less serious than the initial assault two weeks ago and analysts said their effects had dissipated by Friday. A new incident Friday, with police killing a suspect on a London subway train, also did not brake prices.

Light, sweet crude for September delivery rose $1.52 to $58.65 per barrel in afternoon trade on the New York Mercantile Exchange as bargain hunters stepped in. The contract had dropped 89 cents Thursday to close at $57.13 after the explosions in London raised travel concerns.

In other Nymex trading, heating oil futures rose 1.3 cent to $1.5819 a gallon while gasoline rose by 4.7 cents to $1.728 a gallon.

On London’s International Petroleum Exchange, September Brent crude futures climbed 90 cents to $56.62 a barrel.

China’s abandoning the currency peg was “a slight net positive” for country’s short-term oil demand, since imported crude will be cheaper in yuan terms, Barclays Capital said.

“If we are right, then the flow of diesel and gasoline exports out of China could slow down and crude oil imports pick up,” said Kevin Norrish, director of commodity research.

Vienna’s PVM Oil Associates also forecast possible “higher import volumes in the second half” of the year in China because of “higher domestic sales prices in combination with a higher purchasing power in dollar terms.”

But some analysts suggested that over the longer term Beijing’s currency moves will lead to less domestic oil consumption – and falling prices.

“The short-term impact is that oil in U.S. dollar terms will be cheaper to Chinese refiners. The longer-term impact of revaluation is really a cooldown of the Chinese economy,” said Victor Shum, oil analyst at Texas-based energy consultants Purvin & Gertz.

“The macroeconomic cooling will reduce oil consumption in China and put downward pressure on crude prices.”

U.S. Energy Secretary Samuel Bodman said Thursday that the currency change would not make much of a difference in Chinese oil demand.

“The demand for oil is created by economic growth, and the Chinese economy is already growing at a pretty good clip,” he said.

Overall oil demand also will remain strong for “years, if not decades,” he said.

China is the world’s second-biggest user of petroleum products after the United States and third-biggest importer after Japan and the United States.

Late Thursday, China cut its currency link to the U.S. dollar to weigh it against a basket of currencies. As trading opened Friday, it rose about 2 percent against the dollar to the initial state-set rate of 8.11 yuan to the dollar. The yuan will be allowed to trade each day within a narrow 0.3 percent band above and below the price set by the state the day before.

U.S. President George W. Bush had blamed China’s growth – and its increasing appetite for oil – for recent price rises.

But in the past 10 days, both the Paris-based International Energy Agency and the Organization of Petroleum Exporting Countries have slashed forecasts for world oil demand growth, citing weaker-than-expected need from Beijing.

Analysts were also following terror attacks in London, which came exactly two weeks after earlier strikes on the British capital’s public transport system that killed 52 people and four suspected suicide bombers.

The incidents in London could put a dent in consumer confidence and curb the demand for travel to Britain, if not all of Europe, potentially hurting the economy and crimping global fuel consumption, analysts said.

“Two incidents within two weeks will be questioned by casual travelers. But it is probably too soon to tell,” Shum said.

Crude oil prices are around $4 cheaper than its all-time high of $62.10 a barrel set in intraday trading July 7.

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Associated Press writer Yeoh En-Lai in Singapore contributed to this report.