Crude oil breaks the dollar rule for the summer High Noon

This post is a guest contribution by Dian Chu, market analyst, trader and author of the Economic Forecasts and Opinions blog.

Crude oil surged to its highest level in almost eight weeks and gasoline also rose to a 17-month high after the U.S. employment declined less than forecast in February. Encouraged by the upbeat news, investors moved into oil on the expectation that fuel demand will climb as economic growth picks up pace.

Extending the impressive gains of 9.3% in February, crude oil for April delivery settled at $81.50 a barrel on the New York Mercantile Exchange (NYMEX), the highest closing price since Jan. 11. The contract jumped 2.3% in the last week alone.

Positive statements from China that it would maintain its economic stimulus, rekindling hopes for accelerating growth to drain excess oil supplies, also helped support the oil market.

Moving on up via currency?
New York crude has been trading in the $69-$83 range since late September as uncertainty over the global economy has contributed to several failed rallies. The close above $81, capping a 14.5% increase from a year-to-date low last month, sparked speculation that oil could be targeting $85 in the near term.

Now, some traders and analysts say currency movements may play an important role in pushing prices beyond those limits…. but will they?

Breaking the dollar rule
Much of the movement in oil over the past year was driven by overall fund flows out of the U.S. dollar as opposed to supply and demand fundamentals of the commodity. Dollar weakness tends to boost dollar-denominated commodities, and this characterized the relationship between crude and the dollar for most of last year. (Fig. 1)

However, just as the Greece debt crisis negatively impacted the euro pushing gold and the US dollar to trade in tandem (see analysis), the dollar’s no longer in the driving seat dictating the direction of crude prices, as crude and the dollar have both advanced since last December