Oil Surges on Weak Dollar, Hopes for 2011 Growth

The price of oil rose to a three-month high on Tuesday
The price of oil rose to a three-month high on Tuesday

The price of oil rose to a three-month high on Tuesday even as negative economic reports continue to suggest the economy has stalled.

Oil futures traded at $82.39, up $1.05, or 1.3%. Crude continues its break above the $80 mark, after gaining 4.4% in July, the biggest monthly gain since March. Prices are now 17% higher than a year ago.

Some analysts attribute the resiliency of crude prices to the weak U.S. dollar, while others believe a bullish sentiment about growth in 2011 has taken hold, and the market is beginning to price in economic growth that isn't yet evident in the numbers. In such an environment, expect continued volatility as oil prices are likely to climb higher into December.

"With this conclusive break above the $80 price level, market participants are now looking for a $80 to $90 range during 2010 H2," says Samarjit Shankar, the managing director of global strategy at Bank of New York Mellon. "Despite widespread expectations of a slight moderation in global growth during the second half of this year, most emerging countries and regions are looking for stronger growth in 2011."

Home Sales, Factory Orders Down in June

Reports of a 2.6% decrease in the National Association of Realtors' index of used home sales in June and a 1.2% drop in June U.S. factory orders on Tuesday didn't discourage the surge in oil prices. In spite of the indications that the U.S. economy continues to weaken, the market focused on the dollar's weakened position against the euro. A weak dollar supports oil prices, so oil surged.

The dollar index, which measures the U.S. dollar against six other major currencies, fell to 80.589, from 80.870 on Monday. According to Bloomberg, the dollar has declined against 16 major currencies over the last month, including a 5% drop against the euro and 4.7% against the pound.

Phil Flynn, energy analyst at PFGBest, light-heartedly suggested that oil prices were heading higher no matter what the economy does.

"If the economy gets worse, the Fed is going to print more money [which weakens the dollar and supports higher oil prices]! If the economy gets better, well then that is inflationary, because supply will tighten, driving up prices!" he said in his daily note to investors. "It is like a freaky, two-headed bullish coin, or maybe even a coin with two bulls on it."