Bloomberg News

Oil Rises for Fourth Day on Stimulus Speculation

July 27, 2012

Oil rose for a fourth day on speculation that the European Central Bank and the U.S. Federal Reserve will ease monetary policy to boost economic growth and curb the debt crisis.

Prices gained 0.8 percent after ECB President Mario Draghi was said to be planning to hold talks with Bundesbank President Jens Weidmann on stimulus measures including bond purchases. ECB and Fed policy makers are scheduled to gather separately next week to discuss the economy.

“What’s underpinning the market is expectations that we are going to see some kind of action from the ECB and the Fed, and that seems to be why oil prices are firming up around $90,” said Gene McGillian, an analyst and broker at Tradition Energy in Stamford, Connecticut.

Oil for September delivery climbed 74 cents to settle at $90.13 a barrel on the New York Mercantile Exchange. Prices have risen 16 percent since June 28 and fell 1.4 percent this week.

Brent crude for September settlement gained $1.21, or 1.2 percent, to end the session at a one-week high of $106.47 a barrel on the London-based ICE Futures Europe exchange.

Having secured the backing of governments in Spain, France and Germany, Draghi is seeking to win over ECB policy makers for a multi-pronged approach to reduce bond yields in countries such as Spain and Italy, two central bank officials said, speaking on condition of anonymity because the talks are private.

ECB Expectations

“People are expecting the ECB to do something, and if they do, the market would get another bounce,” said Kyle Cooper, director of commodities research at IAF Advisors in Houston.

Draghi’s proposal involves Europe’s rescue funds buying government bonds on the primary market, flanked by ECB purchases on the secondary market to ensure transmission of its record low interest rates, the officials said.

Earlier today, futures rose after German Chancellor Angela Merkel and French President Francois Hollande said they will do “everything” necessary to protect the euro. The remark echoed a comment yesterday by Draghi, who said the ECB will do “whatever it takes” for the common currency to survive.

Germany and France are “bound by the deepest duty” to keep the 17-nation currency bloc intact, Merkel and Hollande said in a joint statement after they spoke by phone today.

“Merkel is saying that they are going to protect the euro and perhaps that’s perceived by the majority as a positive signal because it suggests Germany is going to do its part to bail out the weaker members,” said Sarah Emerson, managing director of Energy Security Analysis Inc. in Wakefield, Massachusetts.

Euro Protection

The ECB’s Governing Council is scheduled to meet Aug. 2 in Frankfurt and gauge the effect of its July decision to cut the benchmark interest rate to a record low of 0.75 percent. The Fed’s Federal Open Market Committee will consider the need for more stimulus at a two-day meeting that concludes Aug. 1.

Fed policy makers are studying options for further easing that could be deployed in case economic growth remains too feeble to produce a lasting decline in unemployment, Chairman Ben S. Bernanke said July 17.

Easing tools include further purchases of assets, such as mortgage-backed securities, reducing the interest rate that the Fed pays on reserves banks keep with the Fed, and altering its communications on the outlook for interest rates, he said.

The central bank bought a total of $2.3 trillion in bonds from December 2008 to June 2011 to stimulate the economy in two rounds of asset purchases known as quantitative easing.

Equities Rally

Oil also followed advances in stocks and other commodities. The Standard & Poor’s 500 Index rose as much as 2.1 percent and the S&P’s GSCI Index of 24 commodities advanced as much as 1.2 percent.

Prices briefly erased gains after the Commerce Department reported U.S. gross domestic product rose at a 1.5 percent annual rate in the second quarter from a revised 2 percent gain in the prior quarter. It was the slowest pace of expansion since the third quarter of 2011. The median forecast of economists surveyed by Bloomberg called for a 1.4 percent increase.

“I am not very impressed by the GDP number and it increases chances for the Fed’s monetary stimulus,” Cooper said. “Oil is moving in lockstep with equities.”

Oil may decline next week, a Bloomberg survey showed. Eighteen of 30 analysts, or 60 percent, forecast crude will decrease through Aug. 3. Nine respondents, or 30 percent, predicted that futures will increase and three said there will be little change in prices.

Electronic trading volume on the Nymex was 379,398 contracts as of 3:29 p.m. in New York. Volume totaled 378,604 contracts yesterday, 32 percent below the three-month average. Open interest was 1.4 million.

-- Editors: Margot Habiby, Bill Banker

To contact the reporter on this story: Moming Zhou in New York at mzhou29@bloomberg.net

To contact the editor responsible for this story: Bill Banker at bbanker@bloomberg.net


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