Oil Rises on Europe Optimism, Fed Stimulus Expectation

Oil advanced on optimism that Europe’s debt crisis is easing and speculation that the Federal Reserve will announce measures to boost the U.S. economy.

Prices rose 0.9 percent as Spanish bond yields declined after the government met its target at a bill auction and European creditors prepared to ease Greece’s bailout terms. The Fed is meeting today and tomorrow to decide whether more monetary stimulus is needed to boost the economy.

“Whenever Europe looks a little bit more stable, it’s going to be helpful to the market,” said Jason Schenker, president of Prestige Economics LLC, an Austin, Texas-based energy consultant. “We’ve got the Fed decision tomorrow and there is some anticipation of additional accommodative policy.”

Oil for July delivery, which expires tomorrow, rose 76 cents to settle at $84.03 a barrel on the New York Mercantile Exchange. Oil is down 15 percent this year. The more actively traded August contract rose 75 cents, or 0.9 percent, to $84.35.

Prices were little changed after American Petroleum Institute reported oil inventories fell 550,000 barrels in the week ended June 15 to 385.1 million. The July contract rose 92 cents, or 1.1 percent, to $84.19 at 4:42 p.m.

Brent oil for August slid 29 cents, or 0.3 percent to $95.76 a barrel on the London-based ICE Futures Europe exchange the lowest settlement since January 2011. The European benchmark’s premium to West Texas Intermediate narrowed $1.04 to $11.41, the lowest level since January.

Spain sold 3.04 billion euros ($3.8 billion) of bills, exceeding a target of 3 billion, according to the Madrid-based Bank of Spain. Demand for Spain’s 12-month bills was 2.16 times the amount offered, compared with 1.84 last month. The bid-to-cover ratio on the 18-month securities rose to 4.42 from 3.23.

Greek Talks

Greece’s election winner, Antonis Samaras of the New Democracy party, began a second day of talks to form a coalition after holding “constructive” meetings with two party leaders. Evangelos Venizelos, leader of the Pasok party, said a new government may be ready by midday tomorrow.

Once a Greek government is formed, representatives of the European Union, the International Monetary Fund, and the European Central Bank will travel to Athens and evaluate requests for adaptations in the aid program, an EU official told reporters on condition of anonymity in Brussels.

“You are seeing some optimism coming out of Europe,” said Phil Streible, a Chicago-based commodities broker at RJO Futures. “There is little chance that Greece will exit the euro zone and that’s helping the market.”

The euro gained as much as 1.2 percent against the dollar. A stronger euro and weaker dollar increase oil’s appeal as an investment alternative.

Equities Rise

Oil also followed gains in U.S. stocks. The Standard & Poor’s 500 Index rose 1 percent and the Dow Jones Industrial Average advanced 0.7 percent.

“We’ve got the euro down and equities up and it boded well for the energy sector,” said Rich Ilczyszyn, chief market strategist and founder of Iitrader.com in Chicago.

The Federal Open Market Committee, which sets the course of Fed policy, will decide whether more monetary stimulus is needed to boost growth as the labor market stumbles and risks from Europe’s sovereign debt crisis rise.

The central bank bought a total of $2.3 trillion in bonds from December 2008 to June 2011 to stimulate the economy in an action known as quantitative easing.

“The risk is more to the upside here, because you will probably see the Fed announcing something,” said Tariq Zahir, a New York-based commodity fund manager at Tyche Capital Advisors. “We are probably going to see a rather large move over the next couple of days.”

Crude Inventories

Oil also rose as U.S. crude inventories probably declined for a third week as refineries operated at the highest rate in almost five years, a Bloomberg survey showed.

Stockpiles dropped 1.3 million barrels, or 0.3 percent, to 383.1 million last week, according to the median of 11 analyst estimates before an Energy Department report tomorrow.

Traders are also watching the Iran nuclear negotiations in Moscow, Zahir said. No breakthrough was reached in the talks with Chinese, French, German, Russian, U.K. and U.S. diplomats. Iran is the second-largest exporter in the Organization of Petroleum Exporting Countries, trailing Saudi Arabia.

Electronic trading volume on the Nymex was 480,058 contracts as of 4:44 p.m. in New York. Volume totaled 569,987 contracts yesterday, 3 percent above the three-month average. Open interest was 1.46 million.

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