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Oil rises towards $79 on Chinese demand outlook

10:07am EDT
By Joe Brock and David Turner
LONDON (Reuters) – Crude oil gained two percent on Monday after China pledged to make its currency more flexible, raising expectations of higher demand from the world’s second largest energy consumer.
Some analysts said a stronger yuan against the U.S. dollar might render Chinese imports of dollar-denominated oil cheaper, boosting energy consumption. China burns about 10 percent of the world’s supply.
“The policy shift in China to allow the yuan to strengthen ought to stimulate domestic oil demand. That’s the underlying reason for the marker going higher,” said Christopher Bellew, London-based oil broker at Bache Commodities.
But the longer-term impact on oil and other commodity prices may be small, further analysts said, since China will not let the yuan rise sufficiently high to make much difference to its companies’ spending power on commodity imports.
U.S. crude for July delivery climbed as high as $78.87 on Monday, the highest since May 6, and was up $1.33 at $78.51 at 1342 GMT.
August ICE Brent rose $1.28 to $79.50 a barrel, the highest since May 14.
U.S. crude has recovered about 21 percent from a trough below $65 a month ago, but is still about $9 lower than the 2010 high. Prices last week began a push above the $65-$75 trading range at which the price had closed every day for several weeks.
“We have broken above the range around $75 and we would expect prices to now rise above $80,” said Amrita Sen, analyst at Barclays Capital in London.
Copper and metals such as platinum and palladium were also up strongly Monday in response to the news about the yuan, since China is a large importer of these commodities.
Reuters’ analysis of official Chinese figures showed on Monday that its oil demand was up 9.4 per cent on the year in May — a mild deceleration after eight months of double-digit growth, but still high.
European and U.S. stock markets climbed more than 1 percent, mirroring Asian equity gains after China’s move toward a flexible currency boosted confidence in the global economy.
Global markets were also set to focus on this week’s U.S. Federal Reserve Federal Open Market Committee (FOMC) two-day meeting on interest rates to June 23, seeking further evidence that low borrowing costs and other economic stimulus measures will remain in place for the rest of the year.
(Additional reporting by Alejandro Barbajosa in Singapore; editing by Keiron Henderson)

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