Oil Rises for Second Day on Fiscal Deal Speculation

Oil rose for a second day in New York on optimism that a U.S. budget agreement will be reached, narrowing the discount to Brent crude to less than $20 for the first time in eight weeks.

Prices gained 0.5 percent as House Speaker John Boehner proposed to raise tax rates on household incomes above $1 million a year in exchange for containing entitlement program costs. President Barack Obama is considering a concession on Social Security cost-of-living increases after Boehner dropped his opposition to raising tax rates for some top earners.

“There is some progress with Boehner indicating a tax increase,” said John Kilduff, a partner at Again Capital LLC, a New York-based hedge fund that focuses on energy. “We are moving closer to a resolution here and that’s helping to stabilize things.”

West Texas Intermediate crude for January delivery advanced 47 cents to settle at $87.20 a barrel on the New York Mercantile Exchange. The increase is the fourth in five days. The February contract gained 42 cents to $87.67.

Brent for February fell 54 cents to settled at $107.64 a barrel on the London-based ICE Futures Europe exchange. Brent’s premium to WTI slipped 96 cents to $19.97 a barrel, the narrowest spread in almost two months.

The Brent-WTI spread declined as Enterprise Products Partners LP (EPD) expects to begin operating the expanded Seaway oil pipeline in early January. Seaway reversed its flow in May to carry crude to Houston from Cushing, Oklahoma, the delivery point for New York oil futures.

Shale Boom

WTI has declined 12 percent in 2012 as the U.S. shale boom deepened the glut at Cushing, America’s biggest storage hub. That has left it at an average $17.35 below Brent this year, compared with a premium of about 95 cents in the 10 years through 2010. Brent, the benchmark grade for more than half the world’s crude, has risen 0.5 percent this year.

Obama and Boehner met for about 45 minutes at the White House today with two weeks remaining to avert more than $600 billion in spending cuts and tax increases set to start in January.

Obama, who wants a tax increase for households with income above $250,000, rejected the proposal from Boehner, who previously opposed higher rates for any income level.

Switching the inflation yardstick to the so-called chained consumer price index would reduce Social Security cost-of-living benefit increases and generate fresh revenue because it also would reset income-tax brackets. Some Democrats in Congress have said they’re willing to make that change.

‘Some Optimism’

“You are getting some optimism that there will be a fiscal deal,” said Tariq Zahir, a New York-based commodity fund manager at Tyche Capital Advisors. “The overall sentiment is getting better and more hopeful.”

The oil market is focusing on “the macroeconomic picture,” said Tim Evans, an energy analyst at Citi Futures Perspective in New York, in an e-mail. Equities advanced, with the Standard & Poor’s 500 Index (SPX) gaining as much as 1 percent.

Prices also rose on speculation that the Federal Reserve will maintain low interest rates to stimulate the economy after manufacturing in the New York region shrank more than forecast in December. The Federal Reserve Bank of New York’s general economic index, known as the Empire State Index, dropped to minus 8.1, the fifth month of contraction, from minus 5.2 in November.

‘Raising Hopes’

The Fed said last week that interest rates will stay low “at least as long” as unemployment remains above 6.5 percent and if inflation is projected to be no more than 2.5 percent. The thresholds replace the Fed’s earlier view that rates would stay near zero at least through the middle of 2015.

“They put the continuity of their monetary easing on the unemployment number and the economy,” said Bill Baruch, senior market strategist at Iitrader.com in Chicago. “The negative Empire manufacturing number is raising hopes for more stimulus.”

Money managers lowered net-long positions, or wagers on higher U.S. oil prices, by 21 percent in the seven days ended Dec. 11, according to the Commodity Futures Trading Commission’s Dec. 14 Commitments of Traders report. It was the biggest drop since the week ended May 8.

Electronic trading volume on the Nymex was 429,126 contracts as of 3:33 p.m. Volume totaled 690,911 contracts on Dec. 14, 33 percent above the three-month average. Open interest was 1.52 million.

-- With assistance from Heidi Przybyla, Kathleen Hunter and Michelle Jamrisko in Washington and Aaron Clark in New York. Editors: Richard Stubbe, Dan Stets

To contact the reporters on this story: Moming Zhou in New York at mzhou29@bloomberg.net

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

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