Oil jumped by more than USD 2 before paring gains on Tuesday with Brent crude staying atop USD 116 a barrel as the dollar weakened on improved prospects for a bailout for heavily indebted Greece. The euro rose to a three-week high against the dollar as the European Union stepped up efforts to draft a second bailout package for Greece. Brent crude futures were up USD 1.48 to USD 116.17 at barrel at 1119 GMT, after pushing up over USD 2 to an intraday high of USD 116.69 a barrel. US crude was up USD 1.68 a barrel to USD 102.28, after reaching a high of USD 102.60, also up over USD 2 on the day. London and New York were closed on Monday for public holidays. "The weaker dollar is the main reason why oil prices are up this morning, on hopes that an aid package for Greece will be struck," said Carsten Fritsch, an analyst at Commerzbank in Frankfurt. The dollar was down 0.51% against a basket of currencies at 1120 GMT. A weaker dollar makes oil cheaper for those holding other currencies. Roy Jordan, research associate at Facts Global Energy, said the dollar was being weighed down by the relatively weak economic data that has come out over the last few days. "There has been an inverse correlation between oil and the dollar over the past month," added Thorbjorn Bak Jensen, oil analyst at Global Risk Management. He said the euro/dollar has now broken above the 50-day moving average and if it closed above this tomorrow, confirming the trend, it would be a very strong bullish signal. Commerzbank's Fritsch suggested that US crude had gained support from the temporary closure of the 591,000-barrel-a-day Keystone pipeline, which carries oil from Alberta to US oil hub Cushing. In a similar vein, Brent is being supported due to production problems in the North Sea which are disrupting the Forties programme. Bak Jensen also pointed to Germany's decision to cease producing electricity from nuclear power plants by 2023. "Over 20% of their electricity comes from nuclear power at the moment so this will give support to coal and oil as well as alternative energy," he said. Despite the rally as traders returned to their desks, both oil contracts are still down for the month of May. Brent is down about 9% and US crude is down about 11% following a broad commodities sell-off at the start of the month. However, the market's focus is now turning to the upcoming OPEC meeting in Vienna in June. Analysts JBC Energy believe an increase in output allocations of 2-2.5 million barrels per day would be justified given the current fundamental situation. "Nevertheless, the outcome of the meeting will once again depend strongly on OPEC kingpin Saudi Arabia's stance on the issue, with the Middle Eastern country holding some three quarters of the group's idle capacity," it said in a note. Oil was supported by the ending of a truce between tribal groups and forces loyal to Yemen's President Ali Abdullah Saleh, bringing the country closer to civil war. "It's providing continued support to oil prices and protection to the downside," Fritsch said. Yemen's Saleh has refused to step down despite efforts by regional nations to broker a departure amid widespread protests, causing concern that unrest may spill into neighbouring states. "Yemen is regarded as a centre of the al Qaeda terror network and directly borders with Saudi Arabia, the world's largest oil producer," said Commerzbank. "Consequently, there is a high risk of unrest destabilising the entire region." South African President Jacob Zuma made little headway towards brokering a Libya peace deal in talks with Gaddafi on Monday, who is adamant he will not leave Libya. Christopher Bellew, an oil trader at Bache Commodities in London, said the weaker dollar and the situation in the Middle East was currently outweighing the disappointing economic data of the last few days. "Just right now, we're probably seeing a bit of technical buying as well because of a breakout on the charts. But we could easily come in tomorrow and if the next bit of growth data is a little disappointing, the whole thing comes back down again," he said.

Source