Commodity Corner: Crude Rises On Fundamentals, Euro-Zone Hopes

NEW YORK (Dow Jones)

Crude oil futures rose Friday amid high hopes going into a weekend summit of European leaders working to resolve the sovereign debt crisis, following equities and the euro higher.

Prices jumped as trading opened in New York and were up as much as 3% in midmorning trade before settling back. Light, sweet crude for December delivery ended the day up $1.33, or 1.6%, to $87.40 a barrel on the New York Mercantile Exchange. Brent crude on the ICE Futures Europe exchange settled 20 cents lower, or 0.2%, to $109.56 a barrel.

Traders and analysts said the market rose on the belief that European leaders will finally put forth a comprehensive settlement to the European credit crunch that has plagued markets on and off for the last year and a half. Government and finance officials were to hold a series of meetings in Brussels this weekend; French President Nicolas Sarkozy and German Chancellor Angela Merkel issued a joint statement saying they would put forth a plan by Wednesday.

A resolution of the European crisis is expected to be bullish for petroleum demand, as it would avert a wave of defaults that could otherwise undermine the economies of distressed creditor nations.

"It's remarkable how reactive the markets have been to the euro-zone debt situation," said John Kilduff, founding partner of hedge fund Again Capital. "There's a lot of embrace of a plan now being concluded, so the market rallied and will rally to the extent this thing gets sorted out."

Phil Flynn, senior market analyst at PFG Best Research, said he and his colleagues have coined a new phrase to describe what is driving the market up: "We're on hopium," he said.

The Dow Jones Industrial Average was up 198 points at the time of the oil market's close. The euro was up 0.6% and the dollar was down 0.8% against a basket of currencies on the ICE Dollar Index. Oil rises as the dollar falls because the dollar-denominated commodity becomes a more attractive investment for holders of other currencies.

Some analysts are also pointing to tightening U.S. supplies as a driver of Nymex crude futures. In its weekly inventory survey, the U.S. Energy Information Administration reported a large 4.7 million-barrel drawdown of oil stockpiles, bringing inventories to their lowest level in nearly two years. That, along with Libyan supply returning to the global market, is dragging the Brent contract down, and the spread between the two narrowed $1.46 to $22.40.

Still, others note that despite the tight supplies, the very same government report found demand for finished petroleum products at their lowest level in 13 years, and don't see market fundamentals strengthening anytime soon. "While domestic oil balances have tightened, we will continue to emphasize that much of this trend has had little to do with demand side factors," Ritterbusch & Associates said in a note. "Consequently, we still have difficulty constructing a scenario that would carry nearby WTI values much above the $90 mark, at least on a sustainable basis."

Front-month November reformulated gasoline blendstock, or RBOB, settled up 0.91 cent, or 0.3%, to $2.6846 a gallon. November heating oil settled down 1.26 cents, or 0.4%, to $3.0175 a gallon.

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