Bloomberg News

Oil Rises With U.S. Equities as Germany Backs ECB Plan

August 06, 2012

Oil advanced to a two-week high as U.S. stocks gained and as German Chancellor Angela Merkel’s government backed the European Central Bank’s bond-buying plan, adding to optimism that the region’s debt crisis will ease.

Prices climbed 0.9 percent after the Standard & Poor’s 500 Index rose to a three-month high amid better-than-forecast earnings. The euro strengthened against the dollar after Merkel’s deputy spokesman, Georg Streiter, said the government backed the ECB’s plan to help bring down borrowing costs in Spain and Italy.

“The Germans seem ready to go along with the ECB bond- buying proposal,” said Michael Lynch, president of Strategic Energy & Economic Research in Winchester, Massachusetts. “Europe may be coming around, and anything that points to an economic recovery is good for oil. Oil moved together with stocks and the dollar.”

Oil for September delivery increased 80 cents to $92.20 a barrel on the New York Mercantile Exchange, the highest settlement since July 19. Prices have climbed 19 percent since June 28, when they closed at the 2012 low of $77.69.

Brent crude for September increased 61 cents, or 0.6 percent, to settle at $109.55 a barrel on the London-based ICE Futures Europe exchange.

“The stock market is edging higher and we are seeing some buyers coming in,” said Gene McGillian, an analyst and broker at Tradition Energy in Stamford, Connecticut. “The euro is rising against the dollar. It does look like the market has higher levels in front of it.”

S&P, Euro

The S&P index rose as much as 0.6 percent to 1,399.63, the highest intraday level since May 3. The euro climbed as much as 0.5 percent to $1.2444, erasing an earlier decline after Streiter told reporters at a regular press briefing in Berlin today that the ECB’s plan “has the backing of the government.”

A stronger euro and weaker dollar increase oil’s appeal as an investment alternative.

“Everyone is just following equities and the dollar,” said Rich Ilczyszyn, chief market strategist and founder of Iitrader.com in Chicago. “Traders want some clarity from Europe and they are responding to headlines from Germany.”

ECB President Mario Draghi signaled on Aug. 2 that the bank will join forces with governments to buy sovereign bonds in sufficient quantities to remove all doubts about the future of the euro.

The 27 members of the European Union accounted for 16 percent of global oil demand in 2011, according to BP Plc (BP/)’s Statistical Review of World Energy, released in June.

Commodity Prices

Federal Reserve Chairman Ben S. Bernanke said July 17 that policy makers were studying options for further stimulus. The Fed refrained from announcing steps at a meeting last week.

“If you get further central bank balance sheet expansion, which seems to be what’s been indicated, you’ll see commodity prices do better,” said Bill O’Grady, chief market strategist at Confluence Investment Management in St. Louis, which oversees $1.4 billion.

Prices also gained on tension in Syria, where opposition leaders said Prime Minister Riad Hijab has defected in the highest-ranking departure since the uprising against President Bashar al-Assad began last year.

Oil fell earlier on projections that Tropical Storm Ernesto will cross the Yucatan Peninsula, lessening the threat to oil platforms in the Gulf, home to 29 percent of U.S. production.

Toward Belize

Ernesto gained strength in the Caribbean Sea east of Nicaragua and will probably become a hurricane today on a track toward landfall in northern Belize, the U.S. National Hurricane Center said in an advisory at 2 p.m. East Coast time.

“We rallied last week on concerns about the tropical storm,” said Phil Flynn, senior market analyst at the Price Futures Group in Chicago. “Some of the excitement last week has passed a little bit.”

Hedge funds reduced bullish oil bets in the week ended July 31 for the first time in three weeks, according to the Commodity Futures Trading Commission’s Commitments of Traders report on Aug. 3. The wagers dropped 2.6 percent to 137,034 futures and options combined.

Electronic trading volume on the Nymex was 374,581 contracts as of 3:27 p.m. in New York. Volume totaled 628,555 contracts on Aug. 3, 12 percent above the three-month average. Open interest was 1.43 million.

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

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


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