Oil rebounds to trade back above $106 on dollar weakness
D. Sheppard

LONDON, Mar. 31, 2008 (Thomson Financial delivered by Newstex) -- Oil reversed earlier losses to trade back above $106 as a further fall in the dollar overshadowed an easing of tensions in the key Iraqi oil port of Basra.

At 4.00 p.m. New York's West Texas Intermediate crude for May delivery was up 50 cents at $106.11 per barrel, having earlier dipped as low as $104.34.

In London, Brent crude for May delivery was up 85 cents at $104.62 per barrel.

Dollar weakness has encouraged investors to buy into crude, as funds look to hedge against a tumbling currency, inflation concerns and widespread financial weakness. The dollar has slipped to a low of $1.5895 against the euro this afternoon.

'Financial flows have surged due to weakness in the US economy and the dollar, and these themes have not played themselves out yet,' said analysts at Societe Generale. (OOTC:SCREF) 'Similar to gold, oil is a hard asset with intrinsic value.'

Earlier in the day, oil prices had slipped due to a a lull in the fighting in Basra between the Shia Mehdi Army of radical cleric Moqtada Sadr and Iraqi forces, which had propelled crude prices higher last week.

With Moqtada Sadr ordering his troops off the streets on Sunday, the risk to oil supplies through Iraq's southern port has been curbed.

'The reduction in violence reduces the chance that Iraq's oil pipelines will be attacked anytime soon,' said Alaron trader Phil Flynn.

While dollar weakness has sent the complex back higher, gains have been capped by concerns over the strength of demand in the United States as the world's largest economy teeters on the brink of recession.

American crude stockpiles have been rising in recent months, reducing market tightness. With seasonal demand lower in the second quarter and concerns a recession could further dent America's oil needs, some analysts think prices are ready to retreat from recent highs.

'The combined impact of a weakening economy and high oil price inflation are putting pressure on total U.S. oil demand, which has declined by 4 percent from a year ago and is now at the lowest levels since 2004,' said analysts at Goldman Sachs. (NYSE:GS) 'We believe that demand will continue to remain under pressure in the next few months before the impact of the expansionary monetary and fiscal policy and of declining price inflation will help support a recovery.'
Although many analysts see prices beating a retreat in the short-term, concerns over the ability of producers to meet booming demand from the developing world in the future are helping to push prices higher.

d.sheppard@thomson.com

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