Oil Surges Back above USD 75/bbl on Bernanke’s Remarks
OREANDA-NEWS. August 30, 2010. NYMEX for October delivery added USD 1.81 (+2.5%), to USD 75.17/bbl. Crude-oil futures gained 1.8% w-o-w, after two weeks of major losses. London Brent crude rose USD 1.02 to USD 76.04/bbl.
Oil prices moved higher for a third straight day Friday, rallying in stride with equities as investors shrugged off revised Q2 growth data and remarks by the Federal Reserve chief. Bernanke said the US recovery has softened more than expected and the central bank will do all it can to ensure a continuation of the recovery, including “unconventional measures.” The 1.6% growth in US gross domestic product in Q2 surpassed the consensus forecast and tempered concern the economy will relapse into recession. Investors unexpectedly took away some positive sentiment from Bernanke’s speech which, combined with indications that the market was oversold and the better-than-expected revised GDP number gave equities and riskier assets such as oil a shot in the arm.
On the currency front, the US dollar rose against the yen and the Swiss franc but the dollar index was weaker and the greenback was lower versus the euro in volatile trading.
We think there was a fair amount of short covering ahead of the weekend with three tropical systems churning in the Atlantic Ocean also helping lift crude oil futures that had dropped to an 11-week low under USD 71/bbl intraday last Wednesday.
On the weather front, oil market watchers were keeping an eye on of tempests in the Atlantic, putting some storm premium into the market, sources said, though on Friday the storms were not expected to threaten to the energy infrastructure in the Gulf of Mexico. The US National Hurricane Center was monitoring three tropical systems, including Hurricane Danielle, Tropical Storm Earl and a disturbance area likely to be called Frank, though computer models were showing all three veering away from the GoM.
The premium of front-month Brent futures over front-month WTI jumped over USD 2.00 intraday on Friday for the first time since May, when US crude prices fell to a 2010 low below USD 65/bbl.
Moving forward, we think Friday’s rally was mainly due to a positive reading from Bernanke’s toned-down remarks and a better-than-expected GDP revision, and also confirms our assumption that the market was oversold as prices closed in on USD 70/bbl. That said, it remains to be seen how the market will digest the news of another round of quantitative easing vis-а-vis the outlook for risk appetite, including such commodities as oil. In the upshot, we think there is about a 50/50 chance right now that the market will roll back towards USD 70 or head slightly higher into another correction.
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