Oil erases losses, heads for third weekly gain

Oil erased earlier daily losses and traded higher as sentiment for recovering U.S. economy amid increase in U.S. corporate earnings, record drop in crude reserves and positive production price readings boosted demand outlook for the top consumer, offsetting negative economic data from China.

On the New York Mercantile Exchange, WTI crude for August delivery traded at $105.27 per barrel at 14:34 GMT, up 0.35% on the day. Prices held in range between daily high and low of $105.85 and $104.38 per barrel respectively. Light, sweet crude fell 1.5% yesterday following IEAs bearish report for 2014 global demand, but rebounded yesterday, continuing on track towards a third consecutive weekly gain.

Meanwhile on the ICE, Brent oil for August delivery traded at $108.33 per barrel at 14:38 GMT, up 0.54% on the day. Prices fluctuated between days high and low of $108.56 and $107.04 respectively. Brent retreated from a three-month high of $108.87 yesterday following IEAs report, but is also headed at settling the week higher, having advanced 0.5% so far.

Oil prices surged on Friday as reported today U.S. corporate earnings surpassed analysts expectations, pointing at a consistent recovery of the U.S. economy, which boosted demand prospects in the worlds top consumer. JPMorgan Chase & Co. reported a 31% increase in profits in the second quarter compared to the same period last year. Wells Fargo & Co. also reported better-than-expected profit in the second quarter.

Bob Yawger, director of the futures division at Mizuho Securities USA Inc. in New York, said for Bloomberg: “The beginning of earnings season has been positive. Two big banks came out with better-than-expected earnings today, which is supportive. It’s safe to assume that we will see another massive decline in supply because the market is well into backwardation.”

Meanwhile, the Preliminary University of Michigan Confidence indicator for July failed to meet expectations for a rise to 84.7 and stood at 83.9, also below Junes 84.1 reading. However, positive producer inflation pointed at improving economic activity in the U.S. Producer Price Index for June surpassed expectations of a 0.5% rise, surging to 0.8%, above Mays 0.5% reading. On annual basis, PPI also outperformed projections and rose to 2.5%, compared to 1.7% in June 2012 and forecasts for a 2.1% increase. On monthly basis, Core Producer Price Index rose to 0.2%, above both projections and Mays reading of 0.1%, whereas on annual basis Core PPI rose to 1.7%, aligning to June 2012s 1.7% reading and surpassing expectations for a 1.6% gain.

Michael Hewson, analyst at CMC Markets, said for Reuters: “The positive earnings tied in with lower inventories is feeding into better sentiment and pushing oil higher.”

Oil drew support this week by a yet another unexpectedly high fall in U.S. Crude Oil Inventories this week, marking the biggest two-week drop on record. Crude reserves decreased by 9.9 million barrels to 373.9 million in the week ending July 5. Refineries operated at a 0.25% increased capacity, reaching 92.4%, the highest level since August. 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.3

Oil, like all other dollar-denominated commodities, was also boosted as Ben Bernanke backed as much as half of the FOMC policymakers by saying the U.S. economy still needs Feds monetary stimulus as the labor market is still fragile, citing the unchanged Unemployment Rate during June.

Hans van Cleef, an energy economist at ABN Amro Bank in Amsterdam, said for Bloomberg: “Investors have been relieved by the fact that quantitative easing will not be unwound as fast as Bernanke had indicated before. As long as the Fed doesnt signal that will change, that will keep prices elevated for the time being.”