Brent over $105 on Fed vow over interest rates

Reuters, Wednesday 10 Aug 2011

The US Federal Reserve's promise to extend near-zero interest rates for two more years helps reverse a steep slump in oil

Coal produced by Berau Coal is being loaded onto the Beijing 2008 Monrovia ship in Indonesia's East Kalimantan province (Photo: Reuters)

Brent crude rose US$3 on Wednesday after the U.S. Federal Reserve's promise to extend near-zero interest rates for two more years weighed on the dollar and helped reverse a steep slump in oil.

The Fed's unprecedented step prompted investors to get back into riskier assets that use the dollar as a funding currency, leading Wall Street to post its best one-day gain in more than two years and sending copper soaring more than 2 per cent.

Brent crude for September LCOc1 rose by $2.89 to $105.46 a barrel by 0823 GMT, having flirted with intra-day lows of around $98.7 a barrel in the previous session.

U.S. oil CLc1 rose by $2.41 to $81.71 a barrel by the same time, after plumbing session-lows on Tuesday of $79.30 a barrel.

Some analysts warned that despite the initial euphoria, prices could temper later in the week as the prospect of flaccid growth sets in.

"The impact of the Fed move will likely fade by week's end," MF Global analysts wrote in a note. "The Fed's move to keep rates depressed for so long is likely because the central bank realizes that growth will be tepid for some time to come. This scenario does not bode well for commodities, especially base metals and energy."

The U.S. dollar's index against a basket of currencies stayed under pressure after the announcement, down 0.78 per cent by 0821 GMT.

The rebound in prices saw investors brush off off a drop in July implied crude imports in the world's No. 2 consumer, China.

"The economic reality is that if the U.S. enters into a recession, then no matter how strong growth in China is, China will be negatively impacted," said Victor Shum, an analyst at Purvin and Gertz. "What we are seeing is a relief rally after the Fed announced measures to help support the economy."


The International Energy Agency warned that global oil demand growth could more than halve if the global economy grew slowed than expected in 2012.

The agency, which advises industrialised nations on energy policies, said that although it did not make big changes to its oil demand growth estimates for 2011 and 2012 despite a global economic storm, it was very dependent on how the global economy performs in the months to come.

Merrill Lynch analysts fired the latest salvo in a wave of bearish remarks on the global economy, noting the latest data highlights a worldwide slowdown is under way and that the economy stands on 'very frail pillars'.

"The deceleration in U.S. and European economic data suggests that a global economic slowdown has already been unfolding over the past two months," the analysts said in a note. "Leading indicators point to a further cyclical deteriorating ahead. Adding the current uncertainty linked to the US downgrade and the European debt crisis, we find that the global economy is standing on very frail pillars."


Imports of crude to China during July hit a one year low on a daily basis. Customs data showed the country brought in 19.43 million tonnes, or 4.58 million barrels per day (bpd), last month, up 2.5 per cent from a year earlier, but down 1.4 per cent from June.

The nation's implied oil demand rose 7.7 per cent over a year earlier, picking up from June, which marked the slowest growth in more than two years, according to Reuters calculations.

The Organization of the Petroleum Exporting Countries and the U.S. Energy Information Administration cut demand growth forecasts for 2011 in separate monthly reports.

OPEC's expected oil demand growth increase for 2011 was lowered by 150,000 barrels per day (bpd) from the previous report to 1.21 million bpd. The EIA cut its 2011 demand growth forecast by 60,000 bpd but raised its 2012 forecast.

The American Petroleum Institute, in a report late on Tuesday, said U.S. domestic crude stocks fell 5.2 million barrels last week.

That compares with an expanded Reuters poll that forecast crude stockpiles to have risen for the third straight time last week as releases from the Strategic Petroleum Reserve kept moving into commercial inventories.

Twelve analysts polled expected a build in crude stocks for the week to 5 August, with the average forecast coming in at 1.5 million barrels.

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