Oil Hits 6-Month High on Surging Optimism
Oil prices jumped to almost $58 a barrel Thursday, extending gains to near six-month highs on investor expectations that global economic growth may begin to rebound by the end of the year.
Some analysts, however, warned that the higher prices did not reflect market fundamentals but were the result of oil investors mimicking rising equity markets.
Benchmark crude for June delivery was up $1.58 to $57.92 a barrel by mid-afternoon in Europe, in electronic trading on the New York Mercantile Exchange. Earlier in the session, the contract reached a high of $58.16.
The contract Wednesday rose 4.6 percent, or $2.50, to settle at $56.34, the highest level since mid-November.
In London, Brent prices rose $1.48 to $57.63 a barrel on the ICE Futures exchange.
Oil has broken above a trading range of about $45 to $55 a barrel that it had been in since dropping from a record $147 in July. It has lately been boosted by investor perceptions that the worst of a severe U.S. recession may be over.
Governments across the world, led by the U.S. and China, have announced massive fiscal stimulus packages that should eventually spark economic growth and demand for commodities, said Francisco Blanch, head of global commodity research at Bank of America Merrill Lynch.
“If we do re-ignite the global economy, the pressures will come back,” Blanch said. “If we print enough money, we will get people to buy. If you give money to the world, the world will spend it.”
The ADP National Employment Report, an unofficial gauge of the U.S. labor market, said Wednesday that private sector employment fell by 491,000 last month, less than the 708,000 jobs lost in March.
U.S. oil inventories grew less than expected last week, suggesting crude demand may be stabilizing. Inventory levels for the week ended May 1 rose by 600,000 barrels, the Energy Department’s Energy Information Administration said Wednesday in its weekly report. Analysts surveyed by Platts, the energy information arm of McGraw-Hill Cos., had expected a build up of 2.2 million barrels.
“EIA inventory data did not warrant the price developments seen in the futures markets,” said a report by JBC Energy in Vienna. “It is an odd situation indeed when a 605,000-barrel build in crude stocks is interpreted as bullish by a market already awash with 375 million barrels of crude in storage and another 40 million barrels or so anchored out in the Gulf of Mexico.”
U.S. oil trader and analyst Stephen Schork said the bullish investors in the oil market had “hitched their wagon” to equities.
On Thursday, stock indexes across Europe were posting gains near 2 percent, while Asian markets also closed higher, including a rise of 4.6 percent in Japan’s Nikkei index.
“Supplies are high and rising while demand is low and falling but it just doesn’t matter … The S&P was up and that is good enough for oil bulls. This market is rising not because of fundamentals,” Schork said.
That assessment was shared by Britain’s Sucden Financial, which warned that if investors’ focus returned to fundamental factors, “the bearishness, especially of large oversupply, would again come to the fore” and drive prices down.
The global economy usually must grow at least 3 percent a year for prices to rise, said Michael Coleman, managing director of hedge fund Aisling Analytics in Singapore.
“There’s a 20 to 30 percent risk that things stabilize and then get worse again,” Coleman said. “In that scenario, oil would go to $20.”
Production cuts by the Organization of Petroleum Exporting Countries have helped bolster prices, and the cartel next meets May 28 to discuss further possible output reductions. OPEC leaders have said they want oil at $70 a barrel.
“For most of OPEC, including Saudi Arabia, $50 a barrel is enough to break even on government budgets,” Blanch said. “So I don’t think the $70 a barrel number that OPEC is talking about is necessarily a benchmark, it’s just something they would like.”
Investors will be eyeing U.S. bank stress test results set for release on Thursday and April unemployment figures due out Friday for more insight into the health of the economy.
In other Nymex trading, gasoline for June delivery rose 4.94 cents to $1.6774 a gallon and heating oil gained 3.33 cents to $1.5046 a gallon. Natural gas for June delivery was up 6.9 cents to $3.956 per 1,000 cubic feet.
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Associated Press writer Alex Kennedy in Singapore contributed to this report.
5/7/2009 9:17 AM PABLO GORONDI Associated Press Writer