Oil: Investment funds ebb and flow

Oil climbed more than a dollar on Thursday, drawing strength from news that the US economy grew 5.3 per cent year-on-year in the first quarter, its fastest rate for 2-1/2 years, despite high energy costs.

Some traders reasoned the US figures could ease pressure for higher interest rates that would brake demand growth in the world's biggest oil consumer. But analysts stressed the numbers were old and the Federal Reserve would look at fresh data.

US crude settled up US$1.46, or 2 per cent, at US$71.32 a barrel. London Brent crude was up US$1.49 at US$70.71.

Oil, gold, copper and zinc have yo-yoed since hitting record or multi-year highs in recent weeks.

Investment funds have been a driving force behind the rally, and a trigger for steep one-day falls. Even the multi-billion dollar oil market has been buffeted by hedge funds.

But while the volatile July futures contract for US oil has swung between US$68 and US$75 a barrel this month, oil futures as far ahead as January 2009 have remained resolutely above US$70.

"The back end of the curve is a better reflection of fundamentals than the volatile front end," said Tony Machacek of brokerage Bache Financial. "The front end is very unpredictable and not very logical at the moment." The world consumes roughly 85 million barrels a day of oil yet futures markets in New York and London trade around one billion barrels, Libya's top oil official Shokri Ghanem noted in an interview at the Reuters Energy Summit this week.

Gold, which fell 5 per cent on Wednesday, was firmer at around US$649. Copper was up about 3 per cent.

Record highs in commodities prompted concerns about inflation, higher interest rates and a slower global economy.

Oil is below April's record US$75.35, but is still up nearly 15 per cent from the start of the year.

Oil has surged from US$20 a barrel at the start of 2002 in a rally fuelled at one time or another by strong demand from top consumer the United States and the fast-growing economies of China and India, a shortage of refineries to turn crude into fuel and worries over supply from Iran, Iraq and Nigeria.

"We'll be back up in the mid-70s pretty quickly," oil investor Boone Pickens said in a television interview.

A bigger-than-expected rise in weekly US petrol stocks was the main trigger for Wednesday's steep fall in oil prices.

Inventories rose by 2.1 million barrels last week, well ahead of a 1.2 million forecast as refineries delivered increased output ahead of the Memorial Day holiday on May 29, the traditional launch of the US summer driving season.

"The strong build in petrol stocks revealed yesterday certainly nudges some of the bigger issues out of the way," said Justin Smirk, senior economist at Westpac in Sydney. "Before the US summer, there is always a cyclical focus on stock levels." "Anything that takes some of the tension out of the situation with Iran will also weigh on oil prices," said Smirk.

World powers meeting in London on Wednesday said they had made progress on a package of proposed threats and incentives to stop Opec member Iran's nuclear programme, which some believe is for weapons despite Tehran's insistence it wants nuclear power.

Iran is the world's fourth-biggest oil exporter. The dispute has led to concern that oil supplies could be interrupted.

- REUTERS