Oil falls on high inventories, weak demand

By Matthew Robinson

NEW YORK (Reuters) - Oil prices fell on Friday, briefly touching a one-month low as bulging fuel inventories in the United States stirred demand concerns.

U.S. crude futures settled down 59 cents at $76.35 a barrel, after earlier trading down to $75.57 a barrel, the lowest level since mid-October. In London, Brent crude futures fell 47 cents to settle at $75.55 a barrel.

Crude's losses extended a 3-percent drop on Thursday after the U.S. Energy Information Administration reported crude and product stocks in the world's largest energy consumer rose more than expected last week.

A rise of 1.8 million barrels in U.S. crude oil stocks and an increase of 2.5 million barrels in gasoline stocks came as data showed demand still trailing year-ago levels.

Fuel consumption in the United States and other large industrial countries was battered by the economic crisis, pushing crude prices off record highs near $150 a barrel in July 2008 to below $33 a barrel in December.

Prices have recovered since then as markets look toward an economic rebound that could boost oil demand.

"Crude futures are down, still hurt by Thursday's dismal inventory report showing petroleum inventories rose, with demand down, even though refinery rates were down a lot," said Gene McGillian, analyst for Tradition Energy.

"There's a battle in the oil markets between bearish fundamentals and expectations on when the economy turnaround will come."

Oil prices found some support in early afternoon trade from the weaker U.S. dollar following U.S. data that showed a big jump in the U.S. trade deficit.

A weaker dollar can boost demand for oil, which is priced in dollars, since it makes the commodity cheaper for holders of other currencies.

U.S. consumer sentiment fell in early November to the weakest level in three months amid grim expectations for job and income prospects, a survey showed on Friday.

Energy experts say current fundamentals may not support crude prices.

"Today the price of oil may be $70 or $80, tomorrow it may even be $90," Christophe de Margerie, chief executive of French oil major Total (TOTF.PA), said late Thursday. "If you look at supply and demand, the price should be lower.

Exxon Mobil Corp (XOM.N) CEO Rex Tillerson said winter heating demand alone was unlikely to significantly reduce the global fuel inventory glut.

The International Energy Agency, adviser to 28 industrial nations, said on Thursday the world would use more oil in the fourth quarter of this year than in 2008 due to a rebound in energy demand in Asia.

(Reporting by Joshua Schneyer, Matthew Robinson and Gene Ramos in New York; Additional reporting by David Sheppard in London and Felicia Loo in Singapore; Editing by Marguerita Choy)

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China says Fed policy threatens global recovery

China says Fed policy threatens global recovery

By Geoff Dyer in Beijing and Kevin Brown in Singapore

Published: November 15 2009 16:02 | Last updated: November 15 2009 17:31

The US Federal Reserve is fuelling “speculative investments” and endangering global recovery through loose monetary policy, a senior Chinese official warned on Sunday just hours before President Barack Obama arrived in China for his first visit.

Liu Mingkang, China’s chief banking regulator, said that the combination of a weak dollar and low interest rates had encouraged a “huge carry trade” that was having a “massive impact on global asset prices”.

Mr Liu’s unusually blunt remarks underscore how China – the largest US creditor because of its massive holdings of Treasury bonds – has become a trenchant critic of monetary and fiscal policy in the US.The comments came as China and the US sparred at the Asia Pacific Economic Co-operation summit in Singapore over exchange rate policies amid rising international criticism that China’s currency is undervalued.

Since the start of the financial crisis, Chinese officials have issued a number of warnings that the US should not inflate away its mounting debt burden. Before these latest comments, however, Beijing had generally been most critical of US fiscal policy, urging Washington to spend less.

But speaking at a conference in Beijing, Mr Liu said the Fed’s policy of maintaining low interest rates together with the weak dollar posed a threat to the global economic recovery.

“[It] is boosting speculative investment in stock and property markets and will pose new, real and insurmountable risks to the global recovery and particularly to the recovery in emerging markets,” said Mr Liu, who is chairman of the China Banking Regulatory Commission.

“The situation has already encouraged a huge dollar carry trade and had a massive impact on global asset prices,” he added.

However, Mr Liu’s criticism of the Fed comes as China’s own monetary policy is attracting growing scrutiny at home. Critics say the massive expansion in bank loans this year could cause asset price bubbles and inflation.

Qin Xiao, chairman of China Merchants Bank, last month said China “urgently” needed to tighten monetary policy to avoid stock and property market bubbles.

At the Apec meeting in Singapore, the final communiqué from the 21 members was delayed as Hu Jintao, the Chinese president, called successfully for the removal of a reference to the desirability of “market oriented exchange rates that reflect underlying economic fundamentals”.

In a surprise move, the reference had been included in a statement by Apec finance ministers on Thursday, in spite of China’s unwillingness to discuss the issue. Mr Hu ignored the issue in both his speeches and earlier contributions to the Apec debates.

Officials confirmed that it had also been included in the final leaders’ statement, but was removed after a discussion between the US and Chinese leaders.

Lee Hsien Loong, the prime minister of Singapore and Apec summit chairman, did not confirm China’s role in changing the wording of the statement.

But he said some countries were concerned of the possibility of some currencies becoming unstable, and the problem that could arise if governments “had to intervene continually in order to manage their currencies”.

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Obama goes to Beijing

By Jeremy Gaunt, European Investment Correspondent

LONDON (Reuters) - The dollar's long-term decline as the world's dominant currency will be on display next week when Barack Obama visits China, pledging to address what he sees as a "deeply imbalanced" economic and financial relationship.

Investors can probably sleep easy about any nightmare scenario unfolding -- China deciding suddenly to float its yuan currency, for example, or to sell its U.S. Treasuries and buy up a bunch of euros and other coinage with its huge current account surplus.

Such moves would be immense, sinking the already battered dollar, kicking U.S. borrowing costs skywards and driving up currencies in regions struggling to get out of recession.

But the various components of this will at least be aired.

The U.S. president has pledged to discuss the two countries' imbalances, which include a yawning trade gap and huge Chinese holdings of U.S. debt.

Much focus, accordingly, will be on China's managed exchange rate to the dollar, widely viewed in Washington as being significantly undervalued at around 6.83 yuan to the dollar.

Although China insists that it is constantly seeking to perfect its exchange rate, it has barely moved in the past year.

So the potential for a "gesture" to Obama on his visit could keep investors, and forex traders in particular, on their toes.

Then again -- as Thanos Papasavvas, head of currency management at Investec Asset Management, says -- it may be that the "gesture" has already been made.

The People's Bank of China said this week it would base FX changes on capital flows and fluctuations in the values of major currencies. But departing from past language, the central bank did not mention that it would keep the yuan basically stable.

"The fact that they have identified that something needs to be done is itself an action point," Papasavvas said. "We think they will continue their appreciation program next year. I don't thing it means anything dramatic."

DOLLAR DECLINE

Whatever the outcome of Obama's trip, it comes at a time when the dollar is struggling -- with all the implications that has for everything from more costly euro zone exports just as the bloc is exiting recession to potential currency losses for foreign investors in U.S. stocks and bonds.

The U.S. currency was trading around 15-month lows against a basket of major competitors this week. The euro was also driven up above $1.50 for a time.

The latest weekly data from fund trackers EPFR Global shows about $7 billion being poured into U.S. equity funds, although the firm said only about 7 percent of it came from non-U.S. domiciled funds.

There is also evidence that non-U.S. investors have been hedging heavily to protect themselves from dollar losses.

"Overseas investors in U.S. assets appear to be FX-hedged to a much larger degree than U.S. investors with foreign assets," Goldman Sachs wrote in a note.

"As a result, the global rally in risky assets increases the need for non-U.S. investors to hedge their growing asset portfolios, i.e., sell more dollars."

One impact of the weakening dollar that investors will be watching in the coming week is gold, which drives higher when the dollar falls because it becomes cheaper for non-U.S. investors and holds value for those with dollars.

Spot gold hit at all-time peak above $1,122 an ounce this week with little expectation of any major pullback.

Other dollar-denominated commodity prices also get a boost.

IT'S THE ECONOMY

Equity investors, in the meantime, have entered a kind of holding pattern, with the MSCI all-country world index sitting a few points below its cycle high but not breaking through.

This fits with what State Street is seeing in the flows from its institutional investor clients. They are tapering off but not turning risk averse.

"People are on the sidelines waiting for the next signal," said Andrew Capon, of the financial services company's research group.

Other than news from Beijing, any signals in the coming week are likely to come from consumer-related U.S. data. These include retail sales data on Monday and the National Association of Homebuilders report on housing on Tuesday.

Elsewhere, potential market movers include euro zone consumer prices on Monday and British inflation on Tuesday.

(Editing by Ruth Pitchford)

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