Oil Trades Near $79 as US Dollar Strengthens

Oil traders work in the options pit on the floor of the New York Mercantile Exchange Wednesday, Oct. 28, 2009. (AP Photo/Richard Drew)

(AP)

Oil prices traded down at just over $79 a barrel Friday as the strengthening U.S. dollar outweighed news that the U.S. economy had snapped four straight quarters of contraction, suggesting demand for crude will improve.

By midday in Europe, benchmark crude for December delivery was down 69 cents to $79.18 a barrel in electronic trading on the New York Mercantile Exchange. The contract rose $2.41 to settle at $79.87 on Thursday.

Some analysts say oil may soon approach its high for 2009 of $82 a barrel on evidence the U.S. economy, the world's largest, is recovering.

The Commerce Department said the U.S. economy grew at a 3.5 percent annual pace in the third quarter, the best showing in two years and breaking four straight quarters of declines.

The Dow Jones industrial average jumped 2.1 percent Thursday and all major Asian stock indexes rose in early trading Friday.

"The move higher in oil prices is, in our view, fundamentally justified," Barclays Capital said in a report. "On the macroeconomic front, so far the path of recovery has surprised to the upside."

Others, however, remained guarded about the strength of the economic recovery.

JBC Energy in Vienna said that "oil still looks to be overpriced and an increase in GDP after four quarters of decreases does not mean the U.S., or the rest of the world, is out of the woods yet."

Analysts point to still fragile demand and the accumulation of huge stocks of oil and petroleum products as reasons to be cautions.

"With the fervent mood sweeping oil markets (Thursday) the F word — fundamentals — still seems to be far from many minds," JBC noted.

Oil prices are also affected by the dollar's exchange rate. Oil is largely bought and sold in dollars, which allows investors holding currencies like the euro or yen to buy more crude when the U.S. currency falls and sell when the dollar strengthens.