Crude Rises to Two-Month High as Fed Move Signals More Growth

Dec 19, 2013 3:03 pm ET

(For Bloomberg fair value curves, see CFVL <GO>.)

Dec. 19 (Bloomberg) -- West Texas Intermediate crude rose to a two-month high after the Federal Reserve said it will reduce stimulus amid an improving economic outlook and as U.S. fuel consumption increased.

Prices gained for a second day. The Fed is trimming its monthly bond purchases, “reflecting cumulative progress and an improved outlook for the job market,” Chairman Ben S. Bernanke said at a press conference yesterday. Total U.S. petroleum demand increased last week to the most since 2008, according to the Energy Information Administration.

“The Fed signaled that the economy is in a better shape than people had thought, and that’s bullish for crude oil,” said Michael Lynch, president of Strategic Energy & Economic Research in Winchester, Massachusetts. “Stronger demand is suggesting that consumers are actually spending.”

WTI for January delivery rose 97 cents, or 1 percent, to $98.77 a barrel on the New York Mercantile Exchange, the highest settlement level since Oct. 21. The contract expired today. The more-active February contract gained 98 cents to $99.04. Trading was 12 percent below the 100-day average.

Brent for February settlement advanced 66 cents, or 0.6 percent, to $110.29 a barrel on the London-based ICE Futures Europe exchange. Volume was 33 percent below the 100-day average. The European benchmark crude was at a premium of $11.25 to WTI for the same month versus $11.42 yesterday.

Fed Tapering

The Fed is reducing its monthly bond purchases to $75 billion from $85 billion. It coupled its decision to taper with a stronger commitment to maintaining an accommodative policy. Its benchmark interest rate is likely to stay low “well past the time that the unemployment rate declines below 6.5 percent,” the central bank said.

The Fed has said it will keep buying bonds until the outlook for the labor market has “improved substantially.” Bernanke said the program was on its way to meeting that test.

“The market is running up again,” said Addison Armstrong, director of market research at Tradition Energy in Stamford, Connecticut. “It’s still Fed-related. The oil market could be a little bit tighter next year.”

The index of U.S. leading indicators rose more than forecast in November, a sign the economic expansion will gain traction in the months to come. The Conference Board’s index, a gauge of the outlook for the next three to six months, increased 0.8 percent last month, the New York-based group said today. The median forecast of economists surveyed by Bloomberg called for an advance of 0.7 percent.

Crude Demand

Total petroleum demand increased 13 percent last week to 21 million barrels a day, the most since April 2008, the EIA said yesterday. Consumption of gasoline climbed for the first time in six weeks, up 8 percent to 9.02 million barrels a day, according to the EIA, the Energy Department’s statistical arm.

U.S. crude stockpiles slipped by 2.94 million barrels to 372.3 million, bringing the three-week decrease to 19.1 million, according to the EIA. Companies in Gulf Coast states typically delay imports and minimize supplies at the end of the year to reduce local taxes.

“Oil demand looks good,” said Phil Flynn, senior market analyst at the Price Futures Group in Chicago. “The market is in a delicate balance in the aftermath of the Fed announcement.”

Gasoline futures climbed for a fourth day to $2.7401 a gallon on the Nymex, up 3 percent this week. Ultra low sulfur diesel rose to $3.0306, bringing the weekly gain to 1.8 percent.

Implied volatility for at-the-money WTI options expiring in February was 15.1 percent, down from 15.8 percent yesterday, data compiled by Bloomberg showed.

Electronic trading volume on the Nymex was 423,330 contracts at 2:35 p.m. It totaled 528,754 contracts yesterday, 6.1 percent below the three-month average. Open interest was 1.61 million contracts, a 10-month low.

--Editors: Richard Stubbe, Dan Stets