Crude Edges Higher on Euro Strength, US Stimulus Hopes

Oil futures settled slightly higher Tuesday due to the influence of outside markets--and expectations the U.S. Federal Reserve will announce some sort of stimulus after its rate-setting meeting concludes Wednesday.

Crude oil rose 0.9% because of "some strength in the equities market, some weakness in the dollar and traders are factoring in the possibility of stimulus," said Peter Donovan, an oil trader with Vantage Trading.

Light, sweet crude for July delivery settled up 76 cents, at $84.03 per barrel. Brent crude on the ICE futures exchange for August delivery traded at 95.81, up 0.5%, or five cents.

Market participants are expecting the announcement of a stimulus package Wednesday after the conclusion of the Federal Open Market Committee meeting. U.S. equities also rallied over the prospects of monetary easing. Crude usually benefits in stimulus efforts because any boost to economic growth should spur demand for crude oil.

However, Mr. Donovan added markets are being set up for "a little bit of a disappointment" if they hope that too much will be announced Wednesday.

But if a major stimulus plan is announced, it "would be wildly bullish for commodities and equities, and exceptionally bearish for the greenback," said Jason Schenker, president of Prestige Economics LLC, in a note. Mr. Schenker added chances of that happening are low, however, as "significantly more negative economic data" would be required to trigger such a plan.

The most likely outcome is a moderate change in which the Federal Reserve extends the so-called Operation Twist, by which it sells short-term bonds to buy longer-term ones, or signals a longer period of super-low rates, Mr. Schenker said.

The news from Spain, which met its auction target one day after its bond yields rose to levels seen as unsustainable, helped the euro strengthen, with the pan-European currency topping $1.27 in recent trading.

Crude oil, which is priced in the U.S. dollars, normally moves inversely to the U.S. currency, as the cheaper dollar makes crude less expensive for purchasers in other currencies.

Investors remain worried about how Europe's debt crisis will weigh on the global economy, and with it, oil demand. But few have been willing to bet on prices falling below $80 a barrel, particularly with the possibility of central bank action.

Also, the spread between Brent crude and U.S. light sweet crude narrowed by 69 cents, a move that "without a doubt" is due to new supplies of West Texas Intermediate crude flowing from the interior U.S. to the heartland of the U.S. refining industry in coastal Texas and Louisiana through the reversal of the Seaway pipeline connecting Houston to Cushing, Okla., said Mr. Donovan.

Reformulated gasoline futures for July delivery settled down 1.94 cents at $2.6415 per gallon, while heating oil futures for July were up 1.74 cents at $2.6351 per gallon.

Tim Evans, an analyst with Citi Futures Perspective, said these product price moves were due to traders anticipating the end of the driving season and the beginning of the winter season. "In six to 10 weeks, gasoline driving season's over, and you're looking at winter," he said.


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