Bloomberg News

Oil Rises on Surging U.S. Housing Starts and Earnings Reports

July 19, 2011

July 19 (Bloomberg) -- Crude oil rose as U.S. housing starts surged and better-than-estimated earnings sent equities higher, bolstering optimism that the economy of the world’s biggest oil-consuming country will grow.

Oil climbed 1.6 percent after U.S. housing starts in June advanced more than forecast to the fastest pace in five months. Companies including International Business Machines Corp. and Novartis AG beat profit forecasts. The rally accelerated after President Barack Obama endorsed a deficit-cutting proposal by a bipartisan group of senators known as the Gang of Six.

“Any sign of a recovery in the housing market is good for the economic outlook and the oil market,” said Chris Barber, a senior analyst at Energy Security Analysis Inc. in Wakefield, Massachusetts. “Developments in the equity market and dollar have been major drivers of oil recently. It’s being driven by macroeconomics.”

Crude for August delivery rose $1.57 to $97.50 a barrel on the New York Mercantile Exchange, the highest settlement since July 13. Futures have risen 27 percent in the past year.

Prices increased after the American Petroleum Institute reported at 4:30 p.m. that U.S. crude-oil stockpiles dropped 5.18 million barrels to 354.2 million. August oil advanced $2.19, or 2.3 percent, to $98.12 a barrel in electronic trading at 4:32 p.m.

Brent oil for September settlement gained $1.01, or 0.9 percent, to end the session at $117.06 a barrel on the ICE Futures Europe exchange in London. Prices have risen 55 percent in the past year. Brent was $19.20 a barrel more expensive than September Nymex futures, versus $19.80 yesterday.

Equity Rally

Work began on 629,000 houses at an annual pace, up 14.6 percent from the prior month, figures from the Commerce Department showed. The level of starts exceeded the most optimistic forecast in a Bloomberg News survey of economists.

The Standard & Poor’s 500 Index rose 1.6 percent to settle at 1,326.73, and the Dow Jones Industrial Average increased 202.26 points, or 1.6 percent, to 12,387.42.

“IBM had great numbers, which is sending stocks higher,” said Kyle Cooper, director of research for IAF Advisors in Houston. “Oil is moving pretty much in lockstep with the stock market recently.”

Obama said the deficit-cutting proposal as “broadly consistent” with the approach being worked on by his administration. He called the revival of the proposal “good news” that may help move negotiations on the deficit and raising the federal debt ceiling.

Contagion Risk

The euro and oil also increased when European Central Bank council member Ewald Nowotny suggested that the bank may compromise and allow a temporary Greek default. European Union government chiefs plan to meet for the second time in a month on July 21, aiming to break a deadlock over a new Greek rescue that has spooked investors. Greek Finance Minister Evangelos Venizelos said an agreement is “attainable” at the summit.

Nowotny’s comments come as officials work to fix a sovereign debt crisis that’s spreading to Italy and Spain. The ECB has until now argued that any Greek default could spark a new financial crisis, derailing a German push to make investors help foot the bill for a second bailout of the country.

Greece’s sovereign-debt crisis risks infecting the rest of the euro region even if officials avert a default, threatening the global economic recovery, the International Monetary Fund said. German Chancellor Angela Merkel said today that the crisis can’t be resolved in “one spectacular step” at this week’s European leaders’ summit.

The euro increased 0.3 percent to $1.4148 in New York. A stronger common currency and weaker dollar boost the appeal of commodities as an alternative investment. The Standard & Poor’s GSCI Index of 24 raw materials rose 1 percent to 694.61. Eighteen of the commodities advanced.

U.S. Stockpiles

“Prices are rising amid hopes there will be some resolution to the European debt crisis,” said Matt Smith, a commodities analyst for Summit Energy Services Inc. in Louisville, Kentucky. “We had some good housing starts numbers and tomorrow we’re looking at inventories that will likely draw down for crude.”

An Energy Department report tomorrow may show U.S. crude supplies fell 2 million barrels, or 0.6 percent, to 353.5 million last week, according to the median of 15 analyst estimates in a Bloomberg News survey. It would be the seventh straight drop, the longest stretch of declines in two years.

IEA Decision

Futures have gained 2.2 percent in New York since June 22, the day before the International Energy Agency announced a release of strategic stockpiles. IEA member nations are likely to decide against offering more oil after last month’s release failed to curb prices and Middle East output rose, according to a Bloomberg News survey.

The IEA will say on or about July 23 whether members will continue emergency sales to make up for supply choked off by the Libyan conflict. The Paris-based agency is an energy policy adviser to 28 industrialized nations including the U.S., Japan and Germany.

Oil volume in electronic trading on the Nymex was 540,318 contracts as of 4:34 p.m. in New York. Volume totaled 544,671 contracts yesterday, 19 percent below the average of the past three months. Open interest was 1.51 million contracts.

--With assistance from Grant Smith and Lananh Nguyen in London and Ben Sharples in Melbourne. Editors: Richard Stubbe, Dan Stets

To contact the reporters on this story: Margot Habiby in Dallas at mhabiby@bloomberg.net; Mark Shenk in New York at mshenk1@bloomberg.net

To contact the editor responsible for this story: Dan Stets at dstets@bloomberg.net.


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