Bloomberg News

Oil Advances, Gaining With Equities as Bank Shares Rally

June 22, 2012

Oil climbed from an eight-month low as U.S. equities rallied after Moody’s Investors Service’s downgrade of 15 global banks was less severe than threatened.

Crude advanced 2 percent as financial shares gained and the European Central Bank said it will relax some rules on bank collateral. Prices also gained as Gulf of Mexico platforms began evacuations on the growing threat of a tropical storm. Futures fell 5.1 percent this week as manufacturing slumped in the U.S., China and Europe and American supplies rose to a 22-year high.

“There seems to be a bit of bargain-hunting here and in the stock market after the big drop,” said Tim Evans, an energy analyst at Citi Futures Perspective in New York. “The trading is rather noncommittal. This isn’t a signal that we’ll get a stronger rebound next week.”

Oil for August delivery increased $1.56 to settle at $79.76 a barrel on the New York Mercantile Exchange. Futures touched $77.56, the lowest intraday price since Oct. 5. The price is down 19 percent this year.

Brent oil for August settlement gained $1.75, or 2 percent, to end the session at $90.98 a barrel on the London-based ICE Futures Europe exchange. Earlier the contract touched $88.49, the lowest price since Dec. 2, 2010.

The August Brent contract traded at a 28-cent discount to September. It’s the fifth consecutive day that the front-month contract has been cheaper than the second month, a market structure known as contango. That typically signals an excess of supply.

Bank Downgrades

Equities advanced after none of the financial firms was cut more than Moody’s had forecast. The prospect of downgrades had weighed on banks since Moody’s said Feb. 15 it was reviewing 17 banks with capital-markets operations because of fragile confidence and tighter regulations that pinched revenue.

The Standard & Poor’s 500 Index (SPX) climbed 0.8 percent and the Dow Jones Industrial Average advanced 0.6 percent.

“The oil market is trying to decide whether or not to price in a global recession,” said Mike Wittner, head of oil market research at Societe Generale SA in New York. “Weak economic numbers have fed those concerns this week.”

Oil tumbled in intraday trading as the Munich-based Ifo institute said its German business climate index, based on a survey of 7,000 executives, dropped to a two-year low.

Prices dropped 4 percent yesterday after the Federal Reserve Bank of Philadelphia’s general economic index showed manufacturing in the Philadelphia region shrank in June. Analysts predicted no change. Factory output also declined in Europe and China.

‘Incredible Selloff’

“After the incredible selloff yesterday, it appears that the market has already priced in the bad news,” said Phil Flynn, senior market analyst at the Price Futures Group in Chicago. “We need more negative headlines to make new lows.”

Energy platforms in the Gulf of Mexico began evacuations as the weather system off the Yucatan Peninsula threatened to grow into a tropical storm. The Miami-based National Hurricane Center said there’s a 70 percent chance the cluster of thunderstorms will organize into a tropical depression or Tropical Storm Debby in the next two days.

The Gulf is home to 29 percent of U.S. oil output, 6.4 percent of gas production and 40 percent of refining capacity.

OPEC Basket

OPEC’s basket of crudes dropped below $90 a barrel for the first time in more than 17 months. The basket, a weighted average price of the main grades produced by the Organization of Petroleum Exporting Countries, was at $89.48 a barrel yesterday.

The group decided June 14 to retain its group output target of 30 million barrels a day. The 12 member nations pumped about 1.6 million barrels a day more than that limit in May, according to data compiled by Bloomberg.

Saudi Arabia has been trying to lower the price of oil to bolster the global economy as Western nations impose sanctions on Iran. The kingdom pumped 9.9 million barrels of crude a day in May, the highest level since at least January 1989, based on Bloomberg estimates.

“Markets always overshoot,” Wittner said. “Oil, unlike other commodities, has OPEC and Saudi Arabia in particular, which can cut back when needed. The Saudis have accomplished what they aimed to do by reducing prices, increasing inventories and making up for the Iran sanctions that are almost in place.”

European Union sanctions on oil imports from Iran will start on July 1 as agreed by the bloc’s governments and will be implemented without any delay, an EU official said today.

Electronic trading volume on the Nymex was 463,273 contracts as of 3:14 p.m. in New York. Volume totaled 714,879 contracts yesterday, 28 percent above the three-month average. Open interest was 1.43 million.

To contact the reporter 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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