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Oil Prices Backpedal on Dollar Rally

NEW YORK ( TheStreet) -- Oil prices were off to a slow start Monday, falling on a dollar rally that's expected to last at least until the middle of the week.

West Texas Intermediate (WTI) light sweet crude oil for December delivery was sliding $1.07 to $92.25 a barrel, and the December Brent crude contract was behind by 79 cents to $109.12.

Oil prices backpedaled into negative territory following last week's rally, after the Japanese government carried out an intervention overnight to sell the yen. The Ministry of Finance's intervention, according to reports, may have involved as much as 7 trillion yen. The record-high yen-dollar levels were really putting a damper on the Japanese export industry, and the devaluation was a much-needed move for the country.

The dollar was jumping 1.2% to $75.94 against a basket of currencies corresponding to top U.S. trading partners, up 2.8% against the yen and up 1.1% against the euro. The euro took a tumble as traders questioned the ability of European leaders to raise the bailout funds required to keep the region's debt crisis in check. The general lack of clarity on the bailout funds as well China's silence on whether it would be helping with this kept traders cautious.

"It's a scary start to Halloween as economic concerns are putting the frighteners on general markets," said Matt Smith, commodity analyst at Schneider Electric's Summit Energy. "Today we see the optimism from last week disappear like a phantom."

PFG Best's senior energy analyst Phil Flynn thinks the near-term dollar strength that's been pressuring oil Monday could last until at least the middle of the week. Oil, priced in dollars, becomes more expensive for buyers to purchase when the currency is rallying.

"With the Japanese spending a bunch of money with the interventions and seeing it's the end of the month, [dollar strength] should hold until all souls day," said Flynn. Historically, the yen interventions have lasted for at least a few days.

OptionsXpress analyst Michael Zarembski adds that Monday's U.S. dollar rally "may have some staying power" with the help of renewed concerns about the agreements announced at the European summit last week. Right now, the December dollar index is not seeing any major resistance to further upside until the $78 level, and some resistance at $77.

As for December WTI futures, support is still seen near $90, with resistance found at last week's highs of $94.65, he added. Support for the December Brent contract is seen at $107.30, with resistance potentially occurring at $112.80, he continued.

Schork Report analyst Hamza Khan said if concerns about the European bailout funds aren't addressed "it's difficult to call the bottom in WTI," and he would in the near-term look for WTI to trade between the 50-day and 100-day moving averages of $89.61 and $86.04.

Christopher Vecchio, currency analyst at DailyFX, the research arm of online currency trading firm FXCM, said he foresees another boost for the dollar given the potential for another intervention by either the Bank of Japan or Japan's Ministry of Finance. This would, of course, put more pressure on oil.

"There's still significant fire power that one of these two Japanese institutions could use to weaken the yen," he pointed out.

On the other hand, Vecchio also points out that that because Monday's oil price slide wasn't primarily driven by underlying fundamental issues, per se, oil prices could regain some of their footing if concerns about global economic growth remain subdued. This also comes amid signs of a rebound in the Chinese manufacturing sector. Also, the U.S. government's first estimate of third-quarter economic growth came in at 2.5%, compared with growth of 1.3% in the second quarter.

"This week is a very important week in terms of fundamentals," said Vecchio, referring to a spate of key economic releases in the U.S. "It could really sway the markets."

Longer-term, "I think the dollar is going to remain choppy as we head toward the end of the year, prone to bouts of weakness when general optimism increases about the European debt crisis and the U.S. economy, and rallying as a de facto flight to safety when economic concerns bubble up once more," said Smith of Schneider Electric's Summit Energy.

Energy shares were trading in negative territory. EOG Resources (EOG - Get Report) was tumbling 3.5% to $91.82; Triangle Petroleum (TPLM - Get Report) was slumping 6.5% to $5.65; Exxon (XOM - Get Report) was falling 1.4% to $80.35; Apache (APA - Get Report) was slumping 3.3% to $101.52; Anadarko Petroleum (APC - Get Report) was losing 3.8% to $80.54; Chesapeake Energy (CHK - Get Report) was tumbling 3.4% to $28.72; and Kinder Morgan Energy Partners (KMP) was down 0.8% to $75.76.

In separate news, managers at the Hennessy Focus 30 Fund have raised their smaller to mid-cap energy holdings to 13% from 3.3% last year based on companies whose earnings have done well year over year in the last three, six and 12 months. Most of these mid-cap companies have a concentration in the fuel transport business. Holdings now include Tesoro (TSO), World Fuel Services (INT), Sunoco Logistics (SXL), and Oneok Partners (OKS).

-- Written by Andrea Tse in New York.

>To contact the writer of this article, click here: Andrea Tse.
Copyright 2011 Inc. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.

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