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Oil tops US$54 with hints of new demand from China

SIGNS of increasing energy demand in China, the world's second largest consumer, pushed oil above US$54 a barrel yesterday, but concerns over the state of the economic recovery and the spread of the swine flu continue to hold prices in check.

Benchmark crude for June delivery gained US$1.27 to settle at US$54.47 a barrel on the New York Mercantile Exchange after settling at US$53.20 on Friday.

In the summer of 2008, surging demand from countries like China and India affected almost everyone's pocketbook, with oil and gasoline prices skyrocketing.

"There's nothing more bullish for oil than the Chinese manufacturing sector expanding," said Phil Flynn, an analyst at Alaron Trading Corp.

China's monthly survey of purchasing managers for more than 700 manufacturers - a key indicator - rose to 53.5 in April from March's 52.4, the government-sanctioned China Federation of Logistics and Purchasing reported Friday.

Still, for most consumers, it's a completely different energy landscape heading into this summer.

U.S. retail gasoline is nearly 43 percent cheaper now than it was last May and natural gas, used to heat and cool homes, is close to seven-year lows.

Americans are already driving much less than they were last year, even when gasoline prices were soaring. Now fears of a pandemic may be affecting consumer travel, and that could pressure fuel prices further.

Over the weekend, pigs on a Canadian farm were infected with the new swine flu virus - possibly by a farm worker back from Mexico, health officials said.

"That did raise a concern a little bit, and I think oil traders were on guard that people would just get back into that hunker-down-and-not-travel mode," Flynn said.

Decisions on the personal level have already played a part in measurable repercussions for the energy market.

The level of unused crude placed in storage hit an 18?-year high for the third straight week, according to a government report last Wednesday.

That is helping to depress prices for diesel, gasoline, jet fuel and other products made from crude. Refineries are cutting way back on production of gasoline with demand continuing to fall.

Jim Ritterbusch, president of energy consultancy Ritterbusch and Associates, is in line with other industry analysts who expect the government to report this Wednesday that crude levels rose by at least another 3 million barrels.

"At some point you're just going to run out of places to put this stuff with refineries running at such a slow pace," Ritterbusch said.

Oil prices have been following equity markets and Wednesday was no exception, with the Dow Jones industrial average trading up more than 180 points in late afternoon. But many traders on the New York Stock Exchange and elsewhere invest in company shares based on where they think the economy will be in six months.

Ritterbusch said energy markets could soon break with equities.

Oil has traded around US$50 during the past month or so, about a third of its record high in July, as the global economy remains weak.

Because of the fallout from the recession, energy prices are being heavily influenced by economic data.

The U.S. government on Thursday will release its assessment of the health of 19 big banks.

April employment data is due out Friday. American employers cut 663,000 jobs in March sending the unemployment rate up to 8.5 percent, the highest level in more than 25 years.

Retail gasoline prices have been edging up every day since last Tuesday, and climbed a half penny overnight to a U.S. average of US$2.073 for a gallon of regular unleaded, according to auto club AAA, Wright Express and Oil Price Information Service. Gas is more than 3 cents a gallon higher than a month ago, but about US$1.54 a gallon cheaper than it was last year at this time.

Natural gas prices, which have been plummeting for months as factories cut production and jobs, rose 18 cents to settle at US$3.725 per 1,000 cubic feet, but it has fallen faster than even crude prices.

Trader and analyst Stephen Schork maintains that oil markets draw more speculators, and that natural gas prices are a better gauge of the economy.

"In other words, crude oil is extremely overbought compared with natural gas," Schork said in his daily report.

The Organization of Petroleum Exporting Countries meets May 28 to discuss a potential production cut. OPEC has announced 4.2 million barrels a day of output quota reductions since September, but left production levels unchanged at its last meeting in March.

In other Nymex trading, gasoline for June delivery gained 6.86 cents to settle at US$1.586 a gallon and heating oil rose 4.61 cents to settle at US$1.4345 a gallon.

In London, Brent prices rose US$1.73 to settle at US$54.58 a barrel on the ICE Futures exchange.


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