$100 oil could lose shock value

Oil at $100 a barrel could soon lose its shock value as weakness in other asset classes and fundamental strength lure investors and speculators.

US crude on Wednesday hit another new high of $100.40 after on Tuesday closing for the first time above $100 a barrel at $100.01.

It previously touched $100 in intraday trade on January 2 and broke through the level to $100.09 on January 3.

Traders and analysts said there was no single reason for the latest rally, in tandem with strong moves on other commodities. Aluminium on Wednesday touched a nine-month high and copper hit a four-month high on Tuesday.

But they said the price rise, spurred as the market climbed through technical levels, was built on an underlying trend. It marked the end of selling oil short on the basis that a US economic slowdown could impact demand for oil and other commodities.

"Shorting oil because the US economy is going to be weak has always been dangerous. It began unravelling last week and that accelerated," said Paul Horsnell of Barclays Capital.

"A period bouncing either side of $100 would seem to be a reasonable base case," Horsnell said, adding continued strong demand from the Middle East and Asia would offset the impact of any downturn in the US economy.

Equities markets have been hit sharply by concerns about US economic weakness and for a period this year, oil and other commodities were closely correlated with volatility on stock markets.

But analysts said commodities had never really lost their traditional value as an inflation hedge.

"The rally may be less indicative of narrowly-defined energy fundamentals than of fund capital's quest for safe havens and financial hedges against inflation," Antoine Halff of Newedge brokerage wrote in a research note.

Strong price rises on commodity markets can help to fuel the inflation that sends other asset classes reeling.

"People didn't believe in the equity market correction three months ago, now they do," said Mike McGlone, director of commodity indexing at Standard & Poor's.

"A lot of people didn't believe in the inflation risk and now they do".

Although there was little evidence at the start of the year of new investment, as opposed to speculative, money flowing into commodities, analysts think that could change.

S&P GSCI and similar indexes are estimated to attract around $150 billion of new money this year compared with roughly $110 last year, McGlone said.

"But I suspect it will be much higher than that," he added.

Indexes, or baskets of commodities, have traditionally been used by investors, such as pension funds, which lock into the market for the long term, to diversify portfolios.

Mark Mathias, chief executive at London-based fund manager Dawnay Day Quantum, agreed new investors were moving in.

"My guess is you are seeing just the start of institutional flows and that the weight of money that has come in is small," he said. "During 2008 we'll see much more money coming into commodity markets."

The impact on price will not necessarily be another huge leap higher, but it will help to support oil prices, which so far this year have fallen no lower than $86.11.

"We tried to break through the bottom and we couldn't," said Mike Wittner of Societe Generale in London.

Fundamentals of supply and demand are for now tight and political tension has mounted in oil-producing countries like Venezuela and Nigeria.

Tuesday's oil rally drew further momentum from concerns about limited supplies of refined products.

Even so, a break much beyond $100 could be a challenge.

"Can it continue to move past $100?" asked Wittner. "I'm not going to say that can't happen, but I don't think it's warranted fundamentally." (Reuters)

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