Crude Oil Rises Most in Three Months on Inventory Decline, Demand Increase

Oil surged the most in three months in New York after U.S. crude supplies declined the most in a year and demand increased.

Futures rose as inventories fell to a five-month low and demand reached the highest level this year. Oil also gained on speculation that the Federal Reserve will take more action to bolster the economy after the Fed said it would keep interest rates near zero until mid-2013. The dollar slipped to a one-week low against the euro yesterday after the announcement.

“The DOE numbers are great, and lower prices are only going to encourage demand over the next few weeks," said Hamza Khan, an analyst with the Schork Group Inc., a consulting company in Villanova, Pennsylvania. "Given what the Fed said after its meeting, things are going to be bearish for the dollar, so should be bullish for crude oil.”

Crude for September delivery climbed $3.59, or 4.5 percent, to settle at $82.89 a barrel on the New York Mercantile Exchange in the biggest one-day gain since May 9. Yesterday, the contract settled at $79.30, the lowest level since Sept. 29. Prices are down 9.3 percent this year.

Brent oil for September settlement gained $4.11, or 4 percent, to $106.68 a barrel on the London-based ICE Futures Europe exchange. The European benchmark contract’s premium of $23.79 to U.S. futures is a record high.

Supplies Tumble

U.S. stockpiles fell 5.23 million barrels, or 1.5 percent, to 349.8 million barrels last week, the biggest drop since Dec. 17. Inventories were expected to rise 1.35 million barrels, according to the median estimate of 12 analysts and traders in a Bloomberg News survey.

Total products supplied, a measure of demand, surged 652,000 barrels a day, or 3.3 percent, to 20.3 million, the highest level since Dec. 24, according to the Energy Department.

“Those are bullish numbers, and a big drop like that should be treated bullishly by the market,” said Sean Brodrick, a natural resource analyst with Weiss Research in Jupiter, Florida.

Implied volatility for at-the-money options expiring in September, a measure of expected price swings in futures and a gauge of options prices, was 56.4 percent at 3 p.m. in New York up from 31.7 percent a week ago. New York futures have tumbled from a two-year high of $114.83 a barrel on May 2.

’Going Lower’

“The DOE numbers were bullish, but the commodity itself is going lower, and the trend is lower,” said Todd Horwitz, chief strategist at Adam Mesh Trading Group in New York. “I certainly don’t think it’s going to get past $85 now. $85 is probably the new top.”

Crude traded as low as $79.53 after the International Energy Agency said demand may slow and equities fell.

The IEA said threats to global economic recovery may cut oil demand growth next year by more than 60 percent, while keeping underlying forecasts for 2011 and 2012 little changed.

The Paris-based agency, which advises 28 industrialized nations on energy policy, trimmed demand forecasts for 2011 by 60,000 barrels a day as fuel costs weigh on consumers, and raised projections for next year by 70,000 a day to 91.1 million on growth in Japan.

The IEA expects global oil consumption will increase 1.6 million barrels a day, or 1.8 percent, in 2012. It may expand by less than half that amount if worldwide growth misses expectations, it said.

Equities, Dollar

Oil increased as equities pared intraday losses of more than 4 percent before declining further after the trading floor closed. The Standard & Poor’s 500 Index slipped 4.4 percent to 1,120.76 in New York, and the Dow Jones Industrial Average fell 4.6 percent to 10,719.94.

The dollar fell to the lowest level this month after the Fed announcement yesterday, dropping 1.4 percent to $1.4376 per euro and boosting commodities as an alternative investment. The currency gained 1.3 percent at 4:55 p.m. in New York to $1.4178 per euro.

Brent crude oil may fall to $80 a barrel in a “mild” recession, a price that would prompt the Organization of Petroleum Exporting Countries to reduce supply, Bank of America Merrill Lynch said in a report dated yesterday.

Oil volume in electronic trading on the Nymex was 881,188 contracts as of 4:17 p.m. in New York. Volume totaled 1.08 million contracts yesterday, 57 percent above the average of the past three months and the highest level since April 12. Open interest was 1.56 million contracts.

To contact the reporter on this story: Margot Habiby in Dallas at mhabiby@bloomberg.net.

To contact the editor responsible for this story: Dan Stets at dstets@bloomberg.net.

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