Bloomberg News

Oil Gains a Second Day After Fed Commits to Low Interest Rates

January 26, 2012

Jan. 26 (Bloomberg) -- Oil rose for a second day in New York, reaching a one-week high on speculation that Federal Reserve plans to keep U.S. interest rates near a record low will bolster investor demand for commodities.

Futures advanced as much as 1.6 percent after the Fed’s announcement sent the dollar to its lowest in more than a month against the euro, making assets priced in the U.S. currency more attractive. The Federal Open Market Committee said yesterday it expects its benchmark interest rate to stay “exceptionally low” at least until late 2014. A wider ban on Iranian oil than that announced this week by the European Union could boost crude by $30 a barrel, the International Monetary Fund said.

“It’s a big commitment from the central bank,” said Sintje Boie, who correctly predicted in November that oil prices would slide by year-end. “For the markets, it’s a liquidity thing. All this liquidity must go somewhere, and so we have some money also going into oil. Prices are higher because of this bubble of liquidity.”

Crude for March delivery on the New York Mercantile Exchange rose as much as $1.60 to $101 a barrel, the highest price since Jan. 19, and was at $100.74 at 1:32 p.m. London time. The contract rose 45 cents to $99.40 yesterday. Prices are up 15 percent in the past year.

Brent oil for March settlement was up $1.71, or 1.6 percent, at $111.52 a barrel on the ICE Futures Europe exchange in London. The European contract’s premium to Nymex crude was $10.78 a barrel. That’s down from a record $27.88 on Oct. 14.

Near-Zero Rates

The Fed had previously pledged to extend near-zero interest rates through mid-2013. Chairman Ben S. Bernanke also said the central bank is considering additional asset purchases to improve economic growth. The dollar was down 0.5 percent at $1.3169 to the euro after earlier reaching $1.3175, its weakest since Dec. 21.

“We’re getting a bit of a rally on expectations that the Fed will be accommodative,” said Jeremy Friesen, a commodity strategist at Societe Generale SA in Hong Kong who predicts oil to remain “rangebound” at about $100 a barrel in the coming months. “Once people focus again on the euro zone and slow growth we’re expecting in the first half of this year, you’ll see a bit of a correction in the rally.”

U.S. Inventories

Talks on a debt swap to avert a Greek default resume today as international policy makers squabble over the mounting cost of the rescue. European finance ministers have insisted bondholders take bigger losses on their Greek debt.

U.S. crude stockpiles rose 3.56 million barrels last week to 334.8 million, the highest level since the week ended Dec. 2, according to the Energy Department report yesterday. Imports advanced 7.1 percent to 8.85 million barrels a day for the fourth increase in five weeks. Fuel consumption climbed 7.5 percent to 19.2 million barrels a day, the largest increase since Nov. 4, the data showed.

Gasoline inventories fell 390,000 barrels to 227.1 million in the seven days ended Jan. 20, the first decline in four weeks, the report showed. Supplies were forecast to climb by 2 million barrels, the median estimate in a Bloomberg survey.

A halt of Iran’s oil exports to countries in the Organization of Economic Cooperation and Development would likely lead to an increase in crude prices of as much as $30 a barrel, according to the International Monetary Fund.

The blockade of Iranian oil “without offset from other sources” would trigger an initial gain of around 20 to 30 percent, the IMF said yesterday in a document. The closure of the Strait of Hormuz could trigger a much larger rally, it said.

Iran has threatened to close the strait, the transit route for about a fifth of global oil supply, if an embargo against its oil exports is implemented. The European Union announced Jan. 23 that it would ban oil imports from Iran starting July 1 to pressure the Persian Gulf nation over its nuclear program.

Other members of the Organization of Petroleum Exporting Countries would replace any loss in supply caused by the EU’s ban, a person familiar with the oil group’s policy said yesterday. Iran is OPEC’s second-largest producer after Saudi Arabia.

--Editor: John Buckley

To contact the reporter on this story: Ramsey Al-Rikabi in Singapore at ralrikabi@bloomberg.net Grant Smith in London at gsmith52@bloomberg.net

To contact the editor responsible for this story: Stephen Voss on sev@bloomberg.net


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