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Oil Surges Most in More Than a Year on European Agreement

Oil rose the most in more than three years on optimism that Europe’s debt crisis may be contained after leaders agreed to ease repayment rules for emergency loans to Spanish banks and relax conditions on help for Italy.

Futures gained 9.4 percent, trimming the biggest quarterly decline since the final three months of 2008, as leaders of the 17 euro countries dropped requirements that taxpayers get preferred creditor status on aid to Spain’s banks. Prices also advanced because a European Union ban on the purchase, transport, financing and insurance of Iran’s oil starts in July.

“We’re seeing a massive return of risk appetite,” said Mike Wittner, head of oil market research at Societe Generale SA in New York. “The market was impressed by what the Europeans accomplished and there’s a feeling that the worst may be over.”

Oil for August delivery gained $7.27 to settle at $84.96 a barrel on the New York Mercantile Exchange. It was the biggest increase since March 12, 2009, when the market surged 11 percent on speculation OPEC would cut output targets. Prices are down 14 percent this year and have dropped 18 percent this quarter.

Brent oil for August settlement rose $6.44, or 7 percent, to $97.80 a barrel on the London-based ICE Futures Europe exchange. Prices decreased 20 percent from March 30, also the biggest decline since the final quarter of 2008.

Oil has moved for more than two years on the latest developments in the euro region’s debt crisis and its projected impact on the continent’s energy demand. The crisis that began in Greece has spread to Ireland, Portugal, Italy and Spain.

“Expectations that the meeting would end in failure had been baked into the market, so the European agreement has been met with relief,” said Addison Armstrong, director of market research at Tradition Energy in Stamford, Connecticut.

Business Activity

Markets also gained as business activity in the U.S. unexpectedly expanded in June. The Institute for Supply Management-Chicago Inc. said today its business activity barometer increased to 52.9 from 52.7 in May.

The euro advanced as much as 2 percent against the dollar and is headed for the biggest gain against the U.S. currency since October. An increasing euro bolsters the appeal of commodities to investors.

“The euro move is going to give oil a lot of support,” said Sarah Emerson, managing director of Energy Security Analysis Inc. in Wakefield Massachusetts.

The Standard & Poor’s 500 Index (SPX) climbed 2.2 percent and the Dow Jones Industrial Average increased 1.9 percent.

“The market has been all over the place recently,” said Stephen Schork, president of the Schork Group Inc. in Villanova, Pennsylvania. “The volatility has increased because the markets have been comingled. We seem to be racing on a hamster wheel.”

Technical Analysis

Prices may rebound to as high as $90 a barrel if they hold above a support level near $75, according to technical analysis from Iitrader.com. Oil may rise 20 percent from the one-year intraday low of $74.95 touched in October, said Rich Ilczyszyn, chief market strategist and founder of Iitrader.com in Chicago.

The gain may accelerate next week after the EU embargo on Iranian crude starts on July 1, a Bloomberg survey showed. Sixteen of 42 analysts, or 38 percent of those surveyed, forecast oil will rise through July 6. Fourteen predicted a decline and 12 said there will be little change.

“The European surprise and the U.S. business activity numbers are good signs for the economy and boosting all the markets,” said Michael Lynch, president of Strategic Energy & Economic Research in Winchester, Massachusetts. “Oil has additional reasons to be higher. Some traders are probably nervous being short going into the weekend because of the official beginning of the Iranian embargo.”

The EU sanctions are being imposed because western nations say Iran is hiding a nuclear-weapons program. The Islamic republic says its atomic work is peaceful.

Saber Rattling

Iran has complete visibility and can hit any target in the Strait of Hormuz and Persian Gulf, and will soon install missiles on ships with a firing range of more than 300 kilometers (186 miles), state-run Mehr news agency reported, citing a commander of Iran’s Islamic Revolutionary Guards Corps.

“The saber rattling set off by Iran today is only likely to intensify with the imposition of the embargo over the weekend,” said Jason Schenker, president of Prestige Economics LLC, an Austin, Texas-based energy consultant.

OPEC oil production fell from the highest level in more than three years in June led by Iran, a Bloomberg survey of oil companies, producers and analysts showed. Output in Iran, the Organization of Petroleum Exporting Countries’ second-biggest producer after Saudi Arabia, declined 65,000 barrels to 3.16 million barrels a day, the least since June 1992.

Norwegian Strike

Norway’s first industrywide energy strike since 2004 is in its sixth day. The country’s oil and gas unions will maintain their strike at the existing level, Leif Sande, president of Industry Energy, the biggest of the unions, said from Stavanger after a meeting of the three unions involved.

The meeting was aimed at deciding whether to expand the strike action that is currently halting about 250,000 barrels of oil a day, as well as some gas output.

Electronic trading volume on the Nymex was 706,712 contracts as of 3:20 p.m. in New York. Volume totaled 569,745 contracts yesterday, 1.6 percent above the three-month average. Open interest was 1.43 million.

To contact the reporter on this story: Mark Shenk in New York at mshenk1@bloomberg.net

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

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