Oil hits new 15-month high on QE outlook, drop in reserves

WTI crude extended yesterdays major gains, hitting a fresh 15-month high during early European trading. Futures rose 2.9% yesterday as the Energy Information Administration reported a second straight unexpectedly high drop in crude oil inventories. Oil was also supported by a slump in the dollar after Ben Bernanke, Fed Chairman, announced the central bank will continue to run its Quantitative Easing program as the labor market remains fragile, while inflation is low and stable.

On the New York Mercantile Exchange, WTI crude for August delivery traded at $106.98 per barrel at 7:34 GMT, up 0.43% on the day. Light, sweet crude hit a fresh 15-month high of $107.45 per barrel in the early European session, while days low stood at $106.05. The American benchmark rose 2.9% yesterday, the most in two months, extending this weeks advance to 3.6% after settling 7.29% and 2.73% higher during the preceding to weeks.

Meanwhile on the ICE, Brent oil for August delivery traded at $108.72 a barrel at 7:34 GMT, up 0.21% on the day. Brent touched a three-month high at $108.87 per barrel, while days low stood at $108.01. Brent advanced almost 1% this week after posting a 5.59% gain last week.

Oil reserves drop

Yesterday, the EIA reported Crude Oil Inventories fell more than expected for a second straight week. The EIA said crude reserves decreased by 9.9 million barrels to 373.9 million in the week ending July 5, near the upper limit of the average range for this time of the year. Refineries operated at a 0.25% increased capacity, reaching 92.4%, the highest level since August. Crude reserves at New York Mercantile Exchanges delivery point, Cushing, Oklahoma, dropped by 2.7 million in the week ending July 5, the biggest fall since September 2009.

Both gasoline and distillate production increased last week, averaging 9.6 million and 5 million barrels per day respectively. Gasoline stockpiles fell by 2.6 million barrels, or 1.2%, to 221 million, whereas forecasts pointed at an increase and are well above the upper limit of the average range. Distillate fuel stockpiles surged by 3 million barrels to 123.8 million, well above expectations.

Carl Larry, president of Houston-based consultancy Oil Outlooks and Opinions LLC. said for Reuters: “We are finally seeing oil demand catch up with the economic recovery in the U.S., this is putting upward momentum on oil prices.”

EIA’s report generally did not meet analysts’ expectations, showing a much higher drop in crude and gasoline stockpiles and gain in distillate fuel inventories. According to a Bloomberg survey, the agency’s report should have shown crude oil inventories falling by 3.1 million barrels in the week ending July 5. Gasoline stockpiles were expected to have risen by 1 million barrels and distillate fuel reserves should have gained 1 million as well. Expectations for refineries’ operating capacity met projections of a 0.25% increase to 92.4%.

Michael McCarthy, a chief market strategist at CMC Markets in Sydney said for Bloomberg: “Demand for oil is clearly on the rise, particularly as the U.S. economy recovers. Tensions in the Middle East are always a potential driver of higher prices, but the narrowing of the gap between Brent and WTI suggests that it’s actually the demand side of the equation driving things.”

Monetary stimulus continues

Yesterday, Ben Bernanke dampened investors speculation of an earlier than expected deceleration of Feds monetary easing program. He said the U.S. economy needs Feds accommodative monetary easing program over the near-term as while the manufacturing sector, housing industry and other sectors from the industry have improved, the latest 7.6% unchanged reading of the Unemployment Rate pointed at a fragile labor market. Meanwhile, inflation remained stable and low, giving the central bank more room to ease money supply. This comes after in June Bernanke pointed at an imminent scaling back of the monetary stimulus and an end to it by mid-2014, if the needed recovery signs were provided.

Ben Bernankes statement caused the U.S. dollar to plunge on Wednesday, settling 1.4% lower on the day. On Thursday, the dollar index with September settlement traded at 83.26 at 7:29 GMT, down 1.12% on the day. It ranged between days high and low of 84.26 and 82.60. The U.S. currency gauge which measures the greenbacks strength versus six major counterparts has so far lost 1.7% this week after posting a tree-year high of 84.96 yesterday, prior to Bernankes speech.

Dollars weakness boosted oil as the greenback trades in an inverse relation to raw materials. Weakening of the currency makes dollar-priced commodities cheaper for foreign currency holders, boosting their appeal as an alternative investment.

Carl Larry said for Reuters: “Previously there was an anticipation that we would see a tapering of stimulus at the end of the summer, so that spooked traders and we saw that steep drop in June. Now that we know its going to start sometime at the end of the year, it gives the economy some room to grow a little more, and for that unemployment number to get down to around 7 percent, which is going to be good for oil demand growth here.”