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Oil Rises to $100 for First Time Since May After Stimulus

An Oil Pumpjack
Oil rose to $100 a barrel in New York for the first time since May as the Federal Reserve pledged further economic stimulus, while unrest in the Middle East and North Africa fanned concern that supplies will be threatened. Source: Bloomberg

Oil rose to $100 a barrel in New York for the first time since May as the Federal Reserve pledged further economic stimulus, while unrest in the Middle East and North Africa fanned concern that supplies will be threatened.

West Texas Intermediate advanced as much as 2.2 percent to $100.42 a barrel, having last risen above $100 in intraday trading on May 4. The Fed announced additional purchases of mortgage debt yesterday in a third round of so-called quantitative easing, following the European Central Bank’s bond-buying announcement on Sept. 6. Tensions in the Middle East escalated this week after protestors in Libya, Egypt and Yemen demonstrated against a video considered insulting to Islam.

“It’s a great time to put money into oil,” said Michael Lynch, president of Strategic Energy & Economic Research in Winchester, Massachusetts. “The stimulus plans and the Middle East tension are the horses pulling the cart.”

Crude for October delivery has since retreated to $99.52 a barrel, up $1.21, in electronic trading on the New York Mercantile Exchange at 1:41 p.m. London time. Front-month prices are up 0.6 percent this year.

Brent oil for October settlement advanced $1.06 to $116.94 a barrel on the London-based ICE Futures Europe exchange. The European benchmark grade’s premium to West Texas Intermediate was at $17.16.

The Fed said it will expand its holdings of long-term securities with open-ended purchases of $40 billion of mortgage debt a month, and that it will probably hold the federal funds rate near zero “at least through mid-2015.”

Quantitative Easing

The central bank bought a total of $2.3 trillion in bonds from December 2008 to June 2011 in two rounds of asset purchases known as quantitative easing. The Fed’s move followed ECB President Mario Draghi’s earlier statement that the bank has agreed to an unlimited bond-purchase program.

Germany’s top constitutional court on Sept. 12 cleared the way for ratification of the euro-area bailout fund. The Federal Constitutional Court in Karlsruhe dismissed motions that sought to block the 500 billion-euro ($645 billion) fund, known as the European Stability Mechanism, and a deficit-control treaty championed by Chancellor Angela Merkel.

“The decision in Germany to support the European Stability Mechanism makes people feel that the crisis has bottomed out and there is no more threat of a collapse of the euro,” said Lynch.

Attack on Consulate

The Sept. 11 attack on the U.S. consulate in Libya, together with demonstrations in Egypt, Tunisia, Iran and Yemen that were sparked by an anti-Islamic video, amplified Middle East tensions.

Iran, the third-biggest oil producer in the Organization of Petroleum Export, is facing sanctions on its energy and financial industries because of its nuclear program.

Brent crude, used to price more than half of the world’s oil, has traded above $100 for most of the year. The front-month Brent contract dipped below that level in June and early July.

“The events out of Libya and Egypt add to general geopolitical tension that is currently prevailing in the Middle East,” said Harry Tchilinguirian, BNP Paribas SA’s London-based head of commodity markets strategy.

Saudi Arabian Oil Minister Ali al-Naimi said on Sept. 10 that global supply, demand and inventories of crude don’t justify the current increase in oil prices, the official Saudi Press Agency reported.

Futures may decline next week on speculation U.S. crude and fuel inventories will increase as production in the Gulf of Mexico continues its recovery from Hurricane Isaac, a Bloomberg News survey showed. Nineteen of 36 analysts and traders, or 53 percent, predict oil will drop through Sept. 21.27

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