Oil extends rally to 2-year peak on inflation fears

NEW YORK Mon Nov 8, 2010 5:09pm EST

NEW YORK (Reuters) - U.S. oil prices edged up on Monday, posting a sixth straight rise to a two-year peak above $87 a barrel as concerns about the inflationary effect of monetary easing by the central bank kept gold and oil supported despite a bounce by the dollar.

Trading was choppy and volume tepid as investors looked for oil to consolidate last week's 6.6 percent surge as the dollar slumped after the U.S. Federal Reserve said it would buy $600 billion of Treasuries by mid-2011 to stimulate the economy.

"Oil has shown a propensity to decouple from an upside reaction in the dollar during the past couple of sessions, a bullish portent for the petroleum complex in our view," Jim Ritterbusch, president at Ritterbusch & Associates in Galena, Illinois, said in a research note.

"To some extent, the oil appears to have latched onto the gold market as a better proxy for future inflation...."

U.S. crude for December delivery rose 21 cents to settle at $87.06 a barrel, its highest settlement since the $88.95 a barrel on October 8.

Prices earlier reached $87.49, the highest price since $89.82 was struck on October 9, 2008, then fell and bounced off Friday's $85.96 low.

ICE December Brent crude rose 35 cents to settle at $88.46 a barrel.

Gold powered to a record high above $1,400 an ounce, extending its record breaking rally a third day as safe-haven buying prompted by renewed Irish budget problems offset the dollar's bounce. <GOL/>

"This looks like consolidation, with crude bouncing after holding Friday's low. The headlines on Nigeria were out there earlier, and were supportive, and the dollar was not as strong as earlier," said Phil Flynn, analyst at PFGBest Research in Chicago.

Nigeria's main militant group threatened on Monday to launch a series of attacks on oil infrastructure and said it was holding several foreign hostages.

The militants did not immediately claim responsibility when Afren (AFRE.L) said gunmen attacked an offshore oil rig the company operated, kidnapping five crew members including foreigners and injuring two others.

The euro fell a second consecutive session amid budget problems in Ireland and euro zone debt issues. Last week's better-than-expected U.S. jobs data also prompted dollar purchases, boosting the dollar index .DXY measuring the greenback against a basket of currencies. <USD/>

The dollar's recent slide has concerned producers as the value of greenbacks received for dollar-denominated oil diminished.

A stronger dollar can pressure oil prices by improving the value of dollar's paid producers and by sending investment to other markets chasing better returns.

Libya's top oil official and a delegate from one of OPEC's Gulf members said they saw no need for OPEC to boost output targets at its December meeting.

"While the price is inching up, we think the terms of trade are going against OPEC countries and the increase in the price did not even compensate for the loss in the dollar value and the increase in the price of commodities," said Shokri Ghanem, chairman of Libya's National Oil Corporation.

Qatari Oil Minister Abdullah al-Attiyah said the oil market was stable and that countries would have to live with higher prices.

Last week he said that $70 to $90 per barrel was very reasonable for consumers and producers, echoing a similar comment about that price range from Saudi Oil Minister Ali al-Naimi.

(Additional reporting by Gene Ramos in New York, Rebekah Kebede in Perth and Zaida Espana in London; Editing by Marguerita Choy)

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