It may be too soon to exit oil-dollar bet

By Barani Krishnan and Vivianne Rodrigues - Analysis

NEW YORK (Reuters) - The long oil/short dollar bet may be off the table for now as energy prices ease and the U.S. currency rises, but inflation and inherent risks in commodities supply could bring this popular trade back.

For over a year, one of the main themes in currency and commodity markets has been to short -- or sell -- the dollar as U.S. economic health looked suspect, and go long -- or buy -- oil as an insurance against inflation and uncertainties in raw materials supply.

That strategy was one of the main factors that helped push the dollar to historic lows while crude prices doubled from a year ago to record highs of nearly $150 a barrel in July.

The play now is reversing, with the American economy apparently on surer footing compared with Europe and Asia and demand for energy slipping.

The U.S. dollar rose more than 6 percent versus the euro in the past month after it touched a record low of 1.6038 per euro in July, according to Reuters data.

"Oil's gone up too much because people were buying it for all the wrong reasons like not wanting to hold on to the dollar or worrying about putting money in the bank," said Phil Flynn, vice-president and senior market analyst at Alaron Trading, a commodities brokerage in Chicago.

"Barring a major disaster, we expect oil prices could go below $100 maybe by the end of this year, or even faster, as it's obvious that the trend for demand is falling off pretty dramatically," Flynn said.

On the New York Mercantile Exchange, crude was hovering around $118 a barrel on Friday as a powerful storm was poised to enter the Gulf of Mexico, raising concerns about the impact it could have on U.S. offshore oil and gas output.

Analysts said Tropical Storm Gustav could give a major boost to crude prices if it causes destruction of oil production facilities in the Gulf.

But they also said the fallout potential from the storm has been partly mitigated by pledges from both the U.S. government and the International Energy Agency to release emergency oil stockpiles if needed.

This means supply-and-demand of oil will not be such a critical issue even if the storm causes considerable damage.

"The question I have to ask is whether the storm is going to do more damage to supply or more damage to demand," said Alaron's Flynn.

OIL SEEN BELOW $100, THEN REBOUNDING

Some analysts say that discounting a possible negative impact of Tropical Storm Gustav, oil prices could resume their decline and drop to between $105 and $102 per barrel as early as next month through October.

"If that happens it could possibly weigh on the whole commodities complex as oil is a big part of all the commodity indices," said Edward Meir, an energy and base metals analyst at MF Global in New York.