By Christopher Johnson
US dollar slips against basket of other currencies, helping drive commodities higher.
Oil rose above $80 per barrel on Wednesday as the dollar weakened against a basket of other currencies and after an industry report showed US crude oil stocks fell steeply last week.
The dollar has fallen steadily for most of this year and hit a 15-month low this week, helping drive commodities higher as investors have sought hard assets to hedge against the depreciating currency.
Oil is priced in dollars on world markets and energy prices often move in the opposite direction to the U.S. currency.
"The market has picked up as the dollar has retrenched," said Harry Tchilinguirian, oil analyst at BNP Paribas.
"With oil trading (rightfully or wrongfully) inversely with the dollar and positively with equities, buying interest in oil, like other commodities has risen," BNP said in a statement.
US light crude oil futures for December delivery rose more than $1 per barrel to a high of $80.23 before settling back to trade around $79.58 by 13.55 GMT.
London Brent crude gained 55 cents to $79.52.
BNP Paribas raised its average price forecast for US crude in 2010 to $81 a barrel from $78 and also increased its estimate of the average price in the fourth quarter of 2009 to $77 per barrel from $66.
Oil prices were also supported on Wednesday by weekly data from the American Petroleum Institute on Tuesday, which showed US crude inventories fell much more sharply than expected last week, dropping 4.4 million after storms in the Gulf of Mexico disrupted supplies.
Investors awaited a report from the Energy Information Administration at 1530 GMT, considered the most reliable data on the US oil industry, to confirm the API figures.
"If the EIAs confirm the big drawdown, and I think they probably will, the market could move up sharply," said Eugen Weinberg, head of commodity research at Commerzbank.
Financial markets will scrutinise U.S. economic data due on Wednesday to gauge the health of the economy, after reports this week painted a picture of a slow recovery from recession with ample slack to cool inflation.
Indicators on Wednesday include U.S. consumer prices.
The United States is the world's biggest oil consumer and recession there over the past 18 months has helped keep a lid on global demand for fuel. Expectations of economic recovery have helped push oil prices higher this year but several analysts argue that the market may have moved too far too fast.
"Commodities, including oil, have seemed to defy gravity over the last few weeks, partly supported by the dollar, but also on a false assumption that economic recovery will lead to a further rise in prices," said Weinberg.
"That is probably wrong because the economic recovery is already reflected adequately in the current prices," he said.
Gold hit a record high of $1,149.15 an ounce in Europe on Wednesday, partly on the dip in the dollar.
Oil has rallied from below $33 last December even though global demand fell year-on-year for the first nine months of 2009, according to the International Energy Agency. (Reuters)