Weak dollar central to oil price boom

By Jane Merriman - Analysis

LONDON (Reuters) - The weak dollar's leading role in oil's ascent to record highs is partly due to a tide of financial flows into commodity investments but also reflects a shift in the greenback's relationship with crude.

The dollar has traditionally influenced the price of oil and other commodities, including gold and base metals, which are mostly priced in the currency and usually move to compensate for changes in the its value.

So the steep fall in the dollar to record lows against the euro, for example, has helped drive oil to a record of $83.90 a barrel, reached on September 20.

"I'm certainly in the camp of dollar weakness driving crude strength," said Anatol Feygin, head of global commodity strategy at Bank of America.

"With growing OECD inventories, revised lower demand, increased OPEC production and a relatively mild hurricane season, the dollar seems to be much more the issue."

That, analysts say, is because one aspect of its longstanding relationship with oil is changing.

In the past, dollars earned by oil producers flowed into U.S. dollar assets or investments.

The Gulf countries are thought to hold around $3.5 trillion in total dollar reserves, according to Lehman Brothers research.

But investors say the proceeds from the current oil boom -- petrodollars -- have not gone to support the U.S. currency.

"The petrodollars which historically got invested back in the U.S. in dollar-denominated investments now have more options back home or in emerging markets or the euro," said Badung Tariono, who manages an energy fund for ABN AMRO.

"The relative stability of the euro and good opportunities in the rest of the world play a large part as well," he said.

The Qatari-backed investment fund Delta Two, for example, is in talks to buy British food retailer J Sainsbury Plc for about 10.6 billion pounds ($21.34 billion).

The Quatar Investment Authority is vying with Borse Dubai and Nasdaq to buy Nordic exchange OMX.

UPSIDE RISK

"After a generation on the sidelines, the dollar has re-emerged as an upside risk to oil prices," Lehman Brothers said in a research note.