Oil steady as dollar offsets Russia tension

Business Materials 25 August 2008 09:45 (UTC +04:00)

Oil prices were steady Monday in Asia above US$114 a barrel as a strengthening dollar offset continuing tensions between the U.S. and Russian over the conflict in Georgia.

Light, sweet crude for October delivery was down 5 cents at US$114.54 a barrel in electronic trading on the New York Mercantile Exchange by midday in Singapore. The contract tumbled US$6.59 on Friday to settle at US$114.59 a barrel.

"If the U.S. dollar is rising, commodities take a hit. It's been a huge factor." said Gavin Wendt, head of mining and resources research at consultancy Fat Prophets in Sydney.

Speaking at an economic conference Friday, Federal Reserve Chairman Ben Bernanke said he would "act as necessary" to control inflation comments which helped strengthen the dollar against rival currencies.

A falling dollar encourages selling from investors who bought crude oil and other commodities as a hedge against inflation and weakness in the U.S. currency. The euro fell to $1.4760 on Monday.

Wendt said he expects oil prices to rise this year as global demand for energy, led by developing economies such as China and India, outstrip supplies.

"We may see this rally in the U.S. dollar continue in the short-term, but you have to differentiate between speculation and the underlying demand for commodities," Wendt said. "The majority of the increase in commodities over the last five years has been driven by demand from China and the emerging economies being so great that supplies haven't been able to keep up."

Supporting oil prices are ongoing tensions between Russia and the U.S. over Russia's brief war in the former Soviet republic Georgia.

Russia pulled the bulk of its troops and tanks out Friday under a cease-fire agreement, but built up its forces in and around South Ossetia and Abkhazia, another separatist region. They also left other military posts at locations inside Georgia proper.

The war erupted Aug. 7 as Georgia launched a massive artillery barrage targeting the Russian-backed separatist province of South Ossetia. Russian forces repelled the offensive and drove deep into Georgia, taking crucial positions across the country.

The U.S. and EU say both those moves violated Russia's commitments.

A U.S. Navy destroyer loaded with humanitarian aid reached Georgia's Black Sea port of Batumi on Sunday, a move that a Russian general suggested would worsen tensions between the former Cold War foes.

In other Nymex trading, heating oil futures rose 0.39 cent to US$3.135 a gallon, while gasoline prices fell 1.86 cent to US$2.85 a gallon. Natural gas futures increased 3.0 cents to US$7.873 per 1,000 cubic feet.

In London, October Brent crude rose 22 cents to US$114.10 a barrel, AP reported.