Oil gains on China yuan move

By Hibah Yousuf, staff reporter

NEW YORK (CNNMoney.com) -- Oil prices climbed Monday, extending last week's 4.6% advance, as China's decision to allow its currency to appreciate boosted investor confidence.

What prices are doing: Crude oil futures for July delivery, which expire Tuesday, rose 64 cents, or 0.8%, to settle at $77.82 a barrel. Earlier, prices climbed as high as $78.92, or 2.2%.


Oil futures for August delivery, which will be the active contract beginning Wednesday, rose 35 cents, or 0.5%, to $78.61 a barrel.

What's moving the market: China announced Saturday that it will take steps to end the yuan's two-year peg to the dollar and allow the Chinese currency to trade more freely.

Since 2008, China has kept the yuan's value artificially low, making it tougher for U.S. companies to compete. But the People's Bank of China said that as the global economy continues to recover, it will increase its exchange rate's "flexibility."

The central bank added that "the basis for large-scale appreciation does not exist," though some economists think the yuan is undervalued by 20% or more.

A stronger yuan, and in turn a weaker dollar, is considered to be positive for U.S. manufacturers but also raises the price of imports, including oil.

What analysts are saying: "China's announcement is clearly the big news and will push stocks and oil prices higher," said energy economist Jim Williams, president of WTRG Economics.

"I don't think it portends to a great sea change in the economy, but if the dollar drops against the yuan, that gives U.S. manufacturers a little more of an advantage which is good for the economy," Williams added.

He expects oil prices to continue to trade between $70 and $80 a barrel on fundamentals throughout the summer, though good news could push prices up briefly to $85 a barrel, just as bad news could pressure them down to $65 a barrel.  To top of page

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