Oil fell 0.8 percent toward $77 on Tuesday on speculation that a gradual appreciation of the yuan would have a limited impact on China's petroleum imports in the short term. China's spot yuan soared on Tuesday, after the central bank set the currency's daily mid-point at the highest level against the dollar since a revaluation in July 2005, signaling the yuan's ascent may continue. The July contract for U.S. light, sweet crude , which expires at the end of Tuesday's trading session, fell 61 cents to $77.21 a barrel, virtually erasing Monday's gain, after briefly turning positive when the People's Bank of China set Tuesday's yuan mid-point. "Perhaps the market overreacted a bit over the short term," said Yingxi Yu, a Singapore-based commodities analyst with Barclays Capital.
Stocks also fell in Asian trading Tuesday with the Nikkei slipping as profit-taking emerged after a bounce to a one-month high the day before. "It's a positive boost to sentiment following a period of severe risk aversion that has been hitting risky assets including oil, but in terms of the impact on Chinese commodities demand, it's more ambiguous," Yu said. Front-month U.S. crude touched an intraday 6-½ week high near $79 a barrel on Monday, but pulled back as charts indicated technical resistance, ending 64 cents higher at $77.82. Monday's rally came after China's central bank allowed the yuan to surge by nearly 0.5 percent against the dollar in the spot market, the daily limit, following a pledge at the weekend to make the currency more flexible. Commodities and other assets rallied on the prospect of China having even stronger purchasing power. "The increase in purchasing power for China over the medium term could be a positive thing for prices, but in the short term the actual change in Chinese demand is going to be very modest," Yu at Barclays said. "We do not expect a major single one-off appreciation in the yuan. This strengthening of the band and a more flexible exchange rate is in line with our expectations."
A Reuters poll of analysts showed Chinese authorities will only allow up to a 2.4 percent rise for the yuan against the dollar by the end of 2010, keeping its word that it will keep the currency basically stable. U.S. stocks fell and metals pared gains on Monday on uncertainty over how much the China would let the yuan rise after it vowed to allow a more flexible exchange rate. U.S. crude oil inventories dropped by 1.3 million barrels last week as imports declined, a preliminary Reuters poll of analysts showed on Monday, before Tuesday's weekly industry report from the American Petroleum Institute at 2030 GMT. The poll also forecast an average 1.3 million barrel increase in distillates and a slim 100,000 barrel decline in gasoline stocks, ahead of U.S. government statistics to follow on Wednesday from the Energy Information Administration. Oil services companies went to court on Monday seeking to overturn President Barack Obama's six-month ban on deepwater drilling in the Gulf of Mexico after the worst oil spill in U.S. history.
