Oil surges as China relaxes stance on currency

CRUDE oil rose yesterday after China pledged to make its currency more flexible, raising expectations of higher demand from the world's second largest energy consumer.

Some analysts said a stronger yuan against the US dollar might render Chinese imports of dollar-denominated oil cheaper, boosting energy consumption. China burns about 10 per cent of the world's supply.

"The policy shift in China to allow the yuan to strengthen ought to stimulate domestic oil demand. That's the underlying reason for the marker going higher," said Christopher Bellew, a London-based oil broker at Bache Commodities.

But the longer-term impact on oil and other commodity prices may be small, further analysts said, as China will not let the yuan rise sufficiently high to make much difference to its companies' spending power on commodity imports.

US crude for July delivery climbed as high as $78.87 in mid-afternoon trade, the highest since 6 May.

August ICE Brent rose $1.28 to $79.50 a barrel, the highest since 14 May.

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

"We have broken above the range around $75 and we would expect prices to now rise above $80," said Amrita Sen, analyst at Barclays Capital in London.

Copper and metals such as platinum and palladium were also up strongly yesterday in response to the news about the yuan, as China is a large importer of these commodities.

Chinese oil demand was up 9.4 per cent on the year in May – a mild deceleration after eight months of double-digit growth, but still high.