Oil Futures Gain for Second Day on Fed Stimulus Hopes, Rally in Equities

Oil rose for a second day in New York amid speculation the Federal Reserve will bolster efforts to stimulate the economy.

West Texas Intermediate futures increased 1.2 percent as equities climbed and the dollar fell before this week’s meeting of central bankers in Jackson Hole, Wyoming. Fed Chairman Ben S. Bernanke hinted at a second round of asset purchases at last year’s gathering. The Standard & Poor’s 500 Index rose 3.4 percent.

“We’re seeing a rally in both WTI and Brent on the fumes of hope for stimulus from the Federal Reserve,” said Matt Smith, a commodities analyst for Summit Energy Services Inc. in Louisville, Kentucky. “We’re following equities and the weak dollar.”

Crude for October delivery rose $1.02 to settle at $85.44 a barrel on the New York Mercantile Exchange. Futures have fallen 6.5 percent this year.

Prices increased from the settlement, then slipped after the American Petroleum Institute reported at 4:30 p.m. that U.S. crude-oil stockpiles decreased 3.34 million barrels to 347 million and gasoline stockpiles rose 6.37 million barrels to 213.9 million. October oil rose $1.50, or 1.8 percent, to $85.92 a barrel in electronic trading at 4:31 p.m.

Brent oil for October settlement gained 95 cents, or 0.9 percent, to $109.31 a barrel on the London-based ICE Futures Europe exchange. The European benchmark contract was at a premium of $23.87 to U.S. West Texas Intermediate crude futures, down from a record settlement of $26.21 on Aug. 19.

Oil also increased as fighting continued in Libya. Rebels said they entered Libyan leader Muammar Qaddafi’s compound of Bab Al Aziziya in the capital, Tripoli, and raised their flag, Al Arabiya reported.

Libyan Output

Libyan oil production will resume “soon,” though it may take a year to return to pre-conflict levels of 1.5 million barrels a day, Ahmed Jehani, chairman of the rebels’ stabilization team, told reporters today in Dubai. The country’s output fell to 100,000 barrels a day last month, a Bloomberg News survey showed.

The S&P 500 gained 38.53 points to 1,162.35, and the Dow Jones Industrial Average increased 322.11 points, or 3 percent, to 11,176.76 at 4:15 p.m. in New York.

The dollar fell 0.6 percent to $1.4433 per euro at 4:26 p.m. in New York. It touched $1.45 before former Fed Chairman Alan Greenspan said earlier today that the euro “is breaking down.” Crude touched an intraday low of $83.40 a barrel on his remarks.

“Greenspan is talking up the dollar,” said Carl Larry, director of energy derivatives and research with Blue Ocean LLC in New York. “The markets are jittery right now. Libya is still in flux and everybody is unsure about what’s going to happen Friday.”

Bernanke is scheduled to speak Aug. 26 at the annual conference sponsored by the Federal Reserve Bank of Kansas City in Jackson Hole.

Hope for Easing

Fed policy makers said two weeks ago that risks to the economy have increased and they are “prepared to employ” more tools “as appropriate.” The central bank has completed two rounds of asset purchases known as quantitative easing.

“What’s really behind prices is the hope of a third round of quantitative easing,” said Eugen Weinberg, Frankfurt-based head of commodities research at Commerzbank AG, who forecasts Brent crude will average $100 a barrel in the fourth quarter. “But at some point the market will need to adjust to reality.”

Brent advanced even as Goldman Sachs Group Inc. (GS) said Libya’s oil production will recover more quickly than forecast after the “sudden takeover” of fields and export facilities by rebels.

Hunt for Qaddafi

Rebel fighters hunted for Qaddafi and declared his regime over, as government forces kept up their fight in parts of Tripoli.

The Libyan revolt, which began in February, has reduced the availability of light, sweet crude, or oil with low density and sulfur content.

Libya will probably boost supply to 585,000 barrels a day in the next 12 to 18 months, Goldman Sachs said in a report yesterday. The increase may allow the Organization of Petroleum Exporting Countries to delay using spare production capacity by three months, it said. Goldman had previously forecast the nation would be able to pump 250,000 barrels.

A Persian Gulf oil official said OPEC has no immediate plans to cut crude production as Libya’s output will most likely come back gradually and the market will easily absorb its exports. The group may adjust output if Libya’s production were to affect global supply and demand, the official said, declining to be identified because he is not authorized to speak publicly on the matter.

U.S. Supplies

A U.S. government report tomorrow may show U.S. crude inventories probably increased by 1.75 million barrels in the seven days ended Aug. 19, according to a Bloomberg News survey of 14 analysts. The Energy Department report is scheduled for release at 10:30 a.m. tomorrow in Washington.

Oil volume in electronic trading on the Nymex was 536,259 contracts as of 4:28 p.m. in New York. Volume totaled 628,139 contracts yesterday, 8 percent below the average of the past three months. Open interest was 1.46 million contracts, the lowest level since Jan. 3.

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

To contact the editor responsible for this story: Bill Banker at bbanker@bloomberg.net.

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