Bloomberg News

Oil Climbs to Three-Week High on G-20 Discussions, U.S. Sales

October 14, 2011

Oct. 14 (Bloomberg) -- Crude oil rose to a three-week high as the Group of 20 began discussions in Paris on a solution to Europe’s debt crisis and U.S. retail sales climbed.

Futures increased 3.1 percent after G-20 and International Monetary Fund officials said the IMF may bolster its lending resources to help stem the crisis. U.S. retail sales advanced 1.1 percent last month, the Commerce Department said today. Brent oil in London traded at a record premium to West Texas Intermediate, the U.S. benchmark, for the second straight day.

“The debt crisis is far from over but it appears that they are making progress, which is bullish for oil,” said Michael Wittner, the head of oil-market research at Societe Generale SA in New York. “Economic data, especially in the U.S., has improved recently. It’s now mixed, rather than negative.”

Crude oil for November delivery rose $2.57 to $86.80 a barrel on the New York Mercantile Exchange, the highest settlement since Sept. 20. Prices climbed 4.6 percent this week and have dropped 5 percent in 2011.

Brent oil for November settlement rose $3.57, or 3.2 percent, to end the session at $114.68 a barrel on the London- based ICE Futures Europe exchange. November futures expired today. The more active December contract climbed $3.03, or 2.8 percent, to $112.23.

The European benchmark future exceeded the New York contract by $27.88 a barrel today, based on front-month closing prices. The previous record spread was $26.88 yesterday.

‘Waning’ Relevance

The relevance of West Texas Intermediate to oil markets is “waning” as some commodity indexes raise weights of Brent, Barclays Capital said. The Dow Jones-UBS Commodity Index announced Oct. 11 it will include Brent for the first time in January, with a weighting of 5.31 percent, and cut its WTI allocation to 9.69 percent from 14.71 percent. The Standard & Poor’s GSCI Index said on Oct. 6 it will make similar changes.

European leaders may complete a debt plan at an Oct. 23 summit to present to a gathering of G-20 chiefs Nov. 3-4. Yesterday, Standard & Poor’s cut Spain’s credit rating for the third time in three years and new data showed the eight largest U.S. money-market funds almost halved their lending to French banks last month.

“The outlook for an IMF-G-20 plan is overshadowing all of the country and bank downgrades,” said Phil Flynn, vice president of research at PFGBest in Chicago. “The prospect of bailouts is bullish for oil. When there’s a new plan in the works it’s a signal for investors to buy commodities.”

European Proposals

European officials are considering writedowns of as much as 50 percent on Greek bonds, a backstop for banks and continued central bank bond purchases to combat the debt crisis, people familiar with the discussions said. The Greek bond losses may be accompanied by a pledge to rule out debt restructurings in other countries that receive bailouts, said the people, who declined to be identified because the negotiations are ongoing.

The Standard & Poor’s 500 Index advanced 1.3 percent to 1,219.79 and the Dow Jones Industrial Average gained 1.1 percent to 11,602.10. The dollar dropped 0.7 percent to $1.3874 against the euro. A weaker U.S. currency bolsters the appeal of dollar- denominated raw materials as an investment.

“What the market does each day recently depends on how we are looking at the European debt situation,” said Addison Armstrong, director of market research at Tradition Energy in Stamford, Connecticut. “Today we’re wearing rose-tinted glasses.”

The Standard & Poor’s GSCI Index of 24 raw materials climbed 2.6 percent to 639.14. The index is up 5.4 percent this week and headed for the biggest weekly gain since December.

Economic Outlook

“Oil is moving on the economic outlook and the overall strength in commodity markets,” said Rick Mueller, a principal with ESAI Energy LLC in Wakefield, Massachusetts. “It’s responding to the better outlook for U.S. economic growth and speculation that we may be near some sort of resolution to the euro-zone crisis.”

August retail sales climbed 0.3 percent, up from a previous estimate of no change, the Labor Department in Washington said. Ten of 13 major U.S. retail categories showed increases last month, led by auto dealers and clothing stores.

“We’re experiencing a swing in sentiment based on hope and optimism, not a change in the underlying fundamentals,” said Tim Evans, an energy analyst at Citi Futures Perspective in New York. “The retail numbers were nice but we need to see a gain in income as well for this to signal something sustainable.”

OPEC Meeting

The Organization of Petroleum Exporting Countries will meet on Dec. 14 in Vienna to discuss whether to cut or increase member’s production targets.

“The rise in prices will make OPEC’s task a lot easier in December,” Armstrong said. “The Brent price was recently flirting with $100, but is now comfortably higher. There’s probably a comfortable feeling in the Middle East as a result.”

Oil volume in electronic trading on the Nymex was 587,280 contracts as of 3:06 p.m. in New York. Volume totaled 759,857 contracts yesterday, 13 percent above the average of the past three months. Open interest was 1.43 million contracts.

--With assistance from Grant Smith in London. Editors: Richard Stubbe, Dan Stets

To contact the reporters on this story: 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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