* Re-valuation effect on demand may outweigh lower exports
* Oil pared gains after yuan mid-point left unchanged
* Coming Up: China final commodity May trade data
* For a technical view, click: []
(Updates prices)
By Alejandro Barbajosa
SINGAPORE, June 21 (Reuters) - Crude prices rose 2.2
percent on Monday to the highest since early May after China
vowed to allow a flexible yuan exchange rate, raising
expectations of higher petroleum imports by the world's
second-largest oil user.
U.S. crude for July delivery <CLc1> climbed as much as
$1.69 to $78.87, the highest since May 6, and was up $1.66 at
$78.84 at 0757 GMT. Oil temporarily pared gains as did stock
markets after China on Monday set the yuan mid-point unchanged
from Friday, but rebounded as the spot exchange rate
strengthened. []
A stronger yuan against the greenback may render Chinese
imports of dollar-denominated oil cheaper, fanning energy
consumption in a country that burns about 10 percent of the
world's oil, analysts including Ben Westmore, from National
Australia Bank said.
"China is important for the global oil market and an
appreciating yuan is going to help fuel its imports," said
Westmore.
"The natural implication of a re-valuation is that your
import prices are falling. If you expect inflation to be kept
under control, authorities won't need to tighten and that will
have a comparatively stimulatory impact on the domestic
economy."
China announced on Saturday that it would resume making the
yuan flexible, signalling that it was ready to break a
23-month-old peg to the dollar that had come under intense
international criticism. []
But in a lengthy statement about how currency reform would
proceed, the central bank explicitly ruled out a one-off
revaluation, and repeatedly said there was no basis for any big
appreciation, adding that the yuan's value was not far off its
fair level.
The People's Bank of China left the yuan's mid-point
unchanged on Monday from Friday before trading started, but it
later allowed the spot yuan rate <CNY=CFXS> to jump to a
21-month high of 6.8154 against the dollar.
YUAN'S WIDE IMPLICATIONS
Japan's Nikkei, Shanghai's Composite Index and Hong Kong
shares rose more than 2 percent on Monday. S&P futures had
trimmed gains with news of the steady yuan mid-point, then
rebounded. []
"This week people will closely watch the mid-point at least
until something else has more impact," said Clarence Chu, an
energy trader at Hudson Capital Energy in Singapore.
"I would expect a small change this week, but not a
significant change. It will be quite slow because it's going to
hurt their exports," added Chu.
August ICE Brent <LCOc1> rose $1.64 on Monday to $79.86 a
barrel on Monday, the highest price since May 14.
U.S. crude has recovered about 21 percent from a trough
below $65 a month ago, but is still about $9 lower than the
2010 high.
"You are going to struggle to see oil break to the upside
without a great deal of clarity about the euro situation yet,"
Westmore said, adding prices were unlikely to surpass their
early-May 19-month peak above $87 before the end of the year.
Final Chinese commodity trade statistics for May, to be
published later on Monday, were also in focus.
For a Reuters Insider TV interview on the effect of China's
decision on commodity markets: http://link.reuters.com/zeb23m
Analysts have said the yuan may strengthen about 5-10
percent over the year. When China raised the value of the
currency in 2005 by 2.1 percent, commodities rallied for more
than a year after the revaluation, although not solely because
of Beijing's move.
"The positive impact from a re-valuation will offset the
adverse effect on the external sector," Westmore said. "The
U.S. economy is recovering faster than we thought three or four
months ago."
A 3 percent gain of the yuan would have saved China some 56
billion yuan ($8.21 billion) on the nation's commodity
purchases.
"The news of the yuan is more important for metals than for
crude because a larger proportion of metals flows into China,"
Westmore said.
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For a graphic showing China's spending on commodities, click:
http://graphics.thomsonreuters.com/10/CN_CMDBLL0610.gif
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Analysts have also said China's move towards a flexible
yuan was likely to be taken as a vote of confidence in the
global economic recovery's staying power. []
World stocks gained for a ninth straight day on Friday on
improved risk appetite after a Spanish bond auction eased fears
about sovereign debt in Europe and helped the euro hold near
three-week highs. []
In a sign of normalisation, Wall Street's fear gauge, the
Volatility Index <.VIX>, tumbled below 24 on Friday after
setting a 14-month high above 47 in May.
The oil market was also set to focus on this week's U.S.
Federal Reserve's Federal Open Market Committee (FOMC) two-day
meeting on interest rates to June 23, seeking further evidence
that low borrowing costs and other economic stimulus measures
will remain in place for the rest of the year.
BP Plc <BP.L> <BP.N> estimates that a worst-case scenario
rate for the Gulf of Mexico oil spill could be about 100,000
barrels of oil per day, according to an internal company
document released on Sunday by a senior U.S. congressional
Democrat. []
(Editing by Ed Lane)
