Oil near $80, on track for strongest gain in decade

Oil rose towards $80 on Thursday, extending its rally to a seventh day and poised for the best annual gain in a decade, driven by a drop in US crude and fuel stocks as icy weather stoked demand.

The fall in crude stocks in the world's top energy user over the past four weeks, pushing surplus inventories to its lowest in 11 months, eclipsed the firm dollar, which held near 16-week peaks on a soft Japanese yen in Asia trade, before sliding.  

US crude for February delivery rose 49 cents, or 0.6%, to $79.77 a barrel by 0702 GMT, after touching a five-week high of $79.85 in quiet pre-holiday trade. Prices have risen 14% in just over two weeks.

London Brent crude rose 67 cents to $78.70.

After sliding to a five-year low under $33 at the start of 2009, oil prices staged a steady climb to a high of $82, making for an average of $62 for the year. Oil's near 80% rise this year puts it on track for the sharpest gains since 1999.

This came on the back of OPEC supply cuts, a rebound in emerging market demand and the revival of a popular dollaroil spread trade.

"The US market does seem now to be undergoing a fairly rapid burning off of excess inventory, helped along by demand recovery and the continuation of historically low crude mports," Barclays Capital said in a report.

"Crude inventories would be expected to climb from this point into May, but they have ended 2009 with the lowest excess over the five-year average seen at any point during the year."

US crude stockpiles fell by 1.5 million barrels in the week to December 25, just off an expected two million-barrel decline, data from the Energy Information Administration showed.

Crude inventories have slid by 19.5 million barrels in the past four weeks, eroding the excess supply to 50.1 million barrels.

Most of that draw came in the isolated West Coast market, with Gulf Coast and East Coast inventories showing builds, but prices were also lifted by a two million-barrel drop in distillates as cold weather hit the US Northeast, the world's largest heating oil market.

Temperatures were expected to remain unseasonably cold for the next two days, forecaster Meteorlogix said.

Barcap sees 2010 as a bridging year between 2009's demand-side weakness and the return to supply-side tightness in 2011, with geopolitical concerns playing an enhanced role, global refining margins to remain muted, while the overhang of global distillates would slowly ease as recovery mode sets in.

Crude oil's robust end-year rally has also taken back the OPEC basket value to within $2 of its high for the year, and in the past week it has risen by $4.87 to $76.19 a barrel.

Oil's ascent came despite the stronger dollar as the inversely correlated trade that had gained favour as an inflation hedge this year broke down in the face of oil-related geopolitical fears and improving demand outlook.

The dollar was up 7% versus the yen for December, on track for its best monthly performance since February. For 2009, the greenback was up 2.2% versus the Japanese currency, though it still looked to end a volatile year with a modest loss against a basket of major currencies.

The improvement in US consumer confidence, underscoring optimism in its economic recovery, also supported Asian equities, which are set for a near 70% rise on the year.

Commodity markets are on course for their strongest year since 1973, lifted by oil's biggest annual gains in a decade and a 140% surge in copper prices.

Worries about potential supply impact from the political upheaval in OPEC-member Iran have also supported crude prices this week.

Hundreds of thousands of government supporters rallied across Iran on Wednesday, swearing allegiance to the clerical establishment and accusing opposition leaders of causing unrest. Eight people were killed on Sunday and at least 20 pro-reform figures were arrested in anti government protests.