The oil market Tuesday put a smiling face on testimony by U.S. Federal Reserve Chairman Ben Bernanke and bid up oil prices by 0.9% on stronger oil demand and expectations of additional quantitative easing.
Front-month oil futures on the New York Mercantile Exchange settled Tuesday at $89.22 a barrel, up 79 cents. Brent oil futures were trading up 47 cents to $103.84 a barrel. Tuesday's increase marked the fifth straight day Nymex futures have closed higher.
The oil market initially retreated on Mr. Bernanke's testimony, bidding oil to an intraday low when it became clear that the prepared remarks contained no new concrete promises for quantitative easing. But following the initial disappointment, oil prices steadily gained throughout the session, peaking at $89.46 a barrel before receding somewhat.
Some Federal Reserve officials have previously expressed openness to another round of easing, although they have avoided specific plans for enacting it. Past rounds of quantitative easing have boosted oil prices, which are traded in dollars. A weaker dollar following quantitative easing attracts buyers to the oil market because the commodity becomes less costly to other currencies.
Carl Larry, president of Oil Outlooks and Opinions, a research and consultancy firm, said the overall tone of the Senate hearing suggested additional quantitative easing was "inevitable" given the headwinds facing the economy.
"There's no dismissing the fact that we need something," Mr. Larry said. Mr. Bernanke's "overall tone was that it's more likely than not to happen," Mr. Larry said.
Analysts also cited seasonal and geopolitical factors as explaining the rise of oil prices on Tuesday.
The third quarter historically sees stronger oil demand than the second quarter, said Tim Evans of Citi Futures Perspective. What's more, the physical market for Brent oil has seen unexpected tightening in recent months due to the oilfield strike in Norway, unplanned outages in Libya at the time of the election and planned upcoming maintenance in the North Sea.
"Stronger physical demand in the third quarter can support a higher oil prices," Mr. Evans said.
Oil prices were lent further support Tuesday in the aftermath of an incident Monday in which a U.S. ship fired on a fishing vessel near the Strait of Hormuz, killing one person and injuring three. Analysts said the incident forced markets to acknowledge the instability in the region given ongoing tensions between Iran and Western powers.
"The incident was a reminder to the market this region of the world remains very volatile with the possibility of a disruption in the supply of oil still a possibility at any time," said analyst Dominick Chirichella in a note. "Time will tell but for the short term the geopolitical risk is once again slowly building into the price of oil."
The market is also beginning to look ahead to Wednesday's release of U.S. oil inventory results. According to estimates from 11 analysts surveyed by Dow Jones Newswires, crude-oil inventories declined by an average of 1.1 million barrels in the week ended July 13. The analysts projected a build in refined products.
In economic news, industrial output rose 0.4% last month, the Federal Reserve said Tuesday. Capacity utilization increased slightly, as well, climbing to 78.9% from 78.7% the previous month. Those results were a mixed bag in comparison with expectations. Economists surveyed by Dow Jones Newswires forecast a 0.3% rise in output and capacity utilization of 79.2%.
Front-month reformulated gasoline blendstock, or RBOB, settled at a $2.845 per gallon, down 0.97 cents. Nymex heating oil futures settled at $2.842 a gallon, up 1.45 cents.
Copyright (c) 2012 Dow Jones & Company, Inc.
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