BLBG: Oil Declines as Dollar's Gain Dims Commodities' Appeal as Hedge
By Grant Smith
Oct. 21 (Bloomberg) -- Crude oil fell for the first day in three as the U.S. dollar rose to its highest in more than a year against the euro, dimming the appeal of commodities as a currency hedge.
Crude climbed earlier on expectations that OPEC, supplier of 40 percent of the world's oil, will reduce output at an extraordinary meeting in Vienna this week. Iran, the group's second-largest producer, said it favors a cut of between 2 million and 2.5 million barrels a day.
``Over the long term, the oil-dollar correlation is still rather high. It's about 60 percent,'' said Jochen Hitzfeld, an analyst at UniCredit Markets & Investment Banking in Munich. ``We think OPEC will cut production by about 1 million barrels, stabilizing prices.''
Crude oil for November delivery fell as much as $1.13, or 1.5 percent, to $73.12 a barrel on the New York Mercantile Exchange, and was at $73.86 as of 11:57 a.m. in London. It earlier advanced $1.44 or 1.9 percent to $75.69.
Besides Iran, ministers from Algeria, Libya, and Qatar have said the Organization of Petroleum Exporting Countries will need to trim supplies when it gathers on Oct. 24 in Vienna.
``They have to give more than a million,'' or else ``you may see prices sliding further,'' Johannes Benigni, chief executive officer Vienna-based JBC Energy, said in a television interview. ``Taking the severity of the financial meltdown,'' a ``million is enough when it comes to the volume, but not when it comes to the sentiment.''
Move Forward
Crude, down more than 50 percent from its July 11 record of $147.27 a barrel, has gained nearly 8 percent since Oct. 16 when OPEC moved forward the date of their extraordinary meeting, initially scheduled for November.
The organization may be unable to keep prices supported if it fails to properly implement any agreement reached this week, according to MF Global Ltd. Despite having resolved at a summit last month to observe output limits, Bloomberg data showed the group is still overproducing by about 380,000 barrels a day.
``The cartel's track record in managing production in a falling market has not been a good one, as cheating has frequently undermined prior efforts,'' Connecticut-based MF Global analyst Edward Meir said in a report. Even a reduction of 2 million barrels a day will be outweighed by the ``demand vaporization that is taking place,'' Meir said.
Gold, copper and soy beans also fell. Investors often sell crude and other dollar-priced commodities when the U.S. currency gains, undermining their use as an inflation hedge. The dollar climbed to $1.3236 against the euro, the strongest since March 2007, from $1.3344 late yesterday in New York.
Brent crude oil for December settlement fell as much as $1.31, or 1.8 percent, to $70.72 a barrel on London's ICE Futures Europe exchange, and traded at $71.48 at 11:57 a.m. London time.
To contact the reporter on this story: Grant Smith in London at gsmith52@bloomberg.net
