FX COLUMN-Crude comparisons leave dollar in driving seat

Wed Jun 18, 2014 6:45am EDT

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-- Neal Kimberley is an FX market analyst for Reuters. The opinions expressed are his own --

By Neal Kimberley

LONDON, June 18 (Reuters) - The dollar should be the ultimate beneficiary of the prolonged unrest in the Middle East that has already seen the price of oil tick higher on fears of supply disruptions.

Brent oil futures rose towards $114 a barrel on Wednesday as heavy fighting in Iraq continued. Sunni militants took control of most of Iraq's second-largest oil refinery, an official at the refinery said.

Oil traders will be mindful that violence in Iraq, as well as actually threatening oil production in OPEC's second-biggest producer, could also have wider international ramifications given the sectarian nature of the fighting.

While the rise in the oil price has so far been limited, a sustained rise clearly has implications for economic expansion in those countries dependent on imported hydrocarbons.

Japan is a case in point, given its dependence on imported energy after its nuclear power stations were taken off line following the March 2011 earthquake and tsunami that triggered reactor meltdowns at Fukushima.

Japan's energy dilemma can also be seen in a graphic showing the sites of its nuclear power plants and their proximity to active volcanoes and earthquake fault lines: link.reuters.com/zej22w

The euro zone is also very reliant on imported energy, both from the Middle East and Russia.

For a graphic on Russian state-controlled Gazprom's energy exports to Europe: (link.reuters.com/jev68v)

While a little bit of imported inflation via a higher oil price might for the moment appeal to a European Central Bank struggling to head off the risk of deflation, higher fuel prices are ultimately a tax on euro zone consumers at the pump.

The euro zone is also vulnerable to any disruption to gas supplies piped to the currency bloc from Russia via Ukraine, given the deterioration in commercial and political relations between Kiev and Moscow.

HALE SHALE

The United States is in a completely different situation.

While U.S. oil demand grew at the fastest pace in the world in 2013, according to oil company BP's industry benchmark annual review of energy statistics, released on Monday, the United States also raised its crude production.

It recorded its largest annual rise in oil production for a second year in a row with a 13.5 percent increase to above 10 million barrels per day.

For a graphic of U.S. shale oil reserves: link.reuters.com/pup48v

"It is easy to understand the U.S. If you have a lot of cheap domestic oil that feeds into the industry, it will show up eventually in GDP growth numbers," BP Chief Economist Christof Ruhl said on Monday.

If the oil price remains elevated for a good while, the U.S. economy is arguably better placed to cope than those of the euro zone or Japan.

And while the dollar's rise in recent days has been driven more by higher Treasury yields and the prospect of tighter Fed policy, the United States' greater resilience to a higher oil price should be a factor supporting the greenback. (Editing by Hugh Lawson)

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