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Oil rises for fourth day over speculation of European Central Bank stimulus

A view of oil production pipes at the Cenovus Foster Creek SAGD oil sands operations near Cold Lake, Alberta, July 9, 2012. (REUTERS/Todd Korol)

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.

Prices gained as much 0.9 percent as the Fed and ECB officials indicated that they were considering stimulus measures before meetings scheduled for next week. German Chancellor Angela Merkel and French President Francois Hollande said Friday they would do “everything” necessary to protect the euro.

“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 at Tradition Energy in Stamford, Connecticut.

Oil for September delivery climbed 64 cents, or 0.7 percent, to $90.03 a barrel at 11:53 a.m. on the New York Mercantile Exchange. Prices have advanced 16 percent since June 28 and are 1.5 percent lower this week.

Brent crude for September settlement gained 96 cents, or 0.9 percent, to $106.22 a barrel on the London-based ICE Futures Europe exchange.

The comments by Merkel and Hollande echoed a Thursday statement by ECB President Mario Draghi. He pledged that the euro would 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 Friday.

“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.

The ECB is preparing to buy bonds in the secondary market, followed by purchases in the primary market by government-funded bailout funds, French newspaper Le Monde reported Friday.

“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.

Fed policymakers 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 on 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.

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

Oil also followed advances in stocks and other commodities. The Standard & Poor’s 500 Index rose as much as 1.2 percent and the S&P’s GSCI Index of 24 commodities advanced as much as 1.1 percent.

Prices reduced 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.”

Confidence among U.S. consumers dropped in July to the lowest level this year. The Thomson Reuters/University of Michigan final index of sentiment declined to 72.3 this month from 73.2 in June. The gauge was projected to hold at the preliminary reading of 72, according to a Bloomberg survey.

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 would increase and three said there would be little change in prices.

 
A version of this article appeared in the print edition of The Daily Star on July 28, 2012, on page 4.

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