NEW YORK (Reuters) – Oil could hit $100 US a barrel in 2011 if the American dollar does not surge against the euro as it did this year and the economies of China and India expand enough to consume at least a third of production, Bank of America Merrill Lynch said in a forecast June 28. U.S. oil’s benchmark West Texas Intermediate crude and London’s Brent crude were both expected to average $78 a barrel in the second half of this year and $85 through 2011, the bank’s commodity strategist, Francisco Blanch, told a media briefing on the global markets outlook. “We still think oil prices will cross $100 a barrel at some point next year but not if the dollar appreciates against the euro like it did this year,” Blanch said. “Every 10 percent decline in the euro results in a 15 percent decline in oil over a three-month period.” Stronger crude oil prices tend to support crop prices because a portion of the corn and oilseeds produced in the world are used to make fuel.The U.S. dollar has risen 10 percent year-to-date against a basket of major currencies. The greenback’s rally last month had sparked a sharp selloff in commodities as investors holding other monies such as the euro suddenly found dollar-denominated commodities more costly. Growth in China and India was also key to oil prices, Blanch said.”If China and India account for 35 to 40 percent of the world’s growth in oil demand, then it’s possible to hit $100.” U.S. crude last traded above $100 in October 2008, just before the onset of the recession. WTI’s front month contract in New York settled at $78.25 a barrel on June 28.The world economy was expected to grow by 4.4 percent this year and lend support to a cyclical, across-the-board rise in commodity prices, Blanch said. “We see a significant increase in the demand for energy and industrial commodities around the world,” he said. “The commodity super cycle is not over. It is just pausing.” Investors should beware of price swings, he said. “The volatility in commodity prices will remain high compared to historical averages due to structural supply and demand imbalances,” Blanch said.
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