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Oil Prices Spike on Bullish Forecasts


NEW YORK (TheStreet) -- Oil prices were heating up Wednesday on moderately increased risk appetite triggered by bullish oil calls from various financial groups, better-than-expected U.S. economic data, expectations of another round of quantitative easing and mounting European Union pressures on Greece to yield to conditions for its rescue plans.

"Investors feel a tad more certain that Greece will abide," says Kingsview Financial trader Matt Zeman.

West Texas Intermediate (WTI) light sweet crude oil for December delivery was spiking 98 cents to $93.17 a barrel and the December Brent contract was rising $1.27 to $110.81. The U.S. dollar was down 0.6% against a basket of major currencies, according to the dollar index.

In U.S. economic data, the Automatic Data Processing jobs reading showed that private-sector jobs in the U.S. rose by 110,000 in October, compared with the pre-report estimate of 100,000, lending support to market sentiment. This, as traders looked forward to the possibility that the Federal Reserve would hint at further action to stimulate the economy at the conclusion of the Federal Open Market Committee meeting today.

Also fuelling some risk sentiment were confirmations for the oil bulls that it is time to buy into long-dated oil futures. Goldman Sachs is recommending long oil positions in New York December 2012 oil contracts, citing the work-down of stockpiles in Cushing, Okla. Analysts there also sent out buy recommendations for the July 2012 Brent futures contracts.

SEB Commodity Research analysts agree that long-dated crude oil futures are strongly undervalued right now for a number of reasons. The geopolitical crude oil supply risk associated with the Arab Spring revolutions has increased dramatically. In relation to geopolitical risk, the reserve capacity of the Organization of Petroleum Exporting Countries is now insufficient, leading to the risk of a big oil price spike over the coming years. And strong emerging market demand growth will pressure the market balance. "Prices need to be high enough to limit emerging market demand growth and give developing markets time for energy efficiency and alternative energy options," says SEB Commodity Research strategist Filip Petersson.

"Due to a paradigm shift from conventional to unconventional oil production, higher oil prices are needed to make investments in future production capacity viable," he added.

In addition, capital right now is unable to freely flow into investments in future oil supplies in the Middle East and North Africa regions, given that international oil companies aren't free to operate in those regions. Petersson says that increasing nationalism due to the Arab Spring could further limit capital flows into the region and also reduce the degree of willingness to invest there.

Furthermore, increased spending needs in the top-oil producing region of Saudi Arabia to prevent social unrest in the kingdom is likely to result in its needs to defend higher oil prices, says Petersson. Furthermore, the analyst says, more quantitative easing likely to be needed to boost global growth -- leading to commodity inflation and dollar weakness.

Still, options-trading action seemed to suggest that alongside the bulls Wednesday were also quite a few traders that continued to hold a more pessimistic view on oil prices, at least until the end of the year. The December WTI 2011 crude oil contract appeared to be experiencing limited gains, range-bound with yesterday's lows of $89.17 acting as support and $94.65 exhibiting strong resistance, according to analysts at online trading platform optionsXpress.

"In oil options trade there appears to be some selling interest in the deep out of the money puts with the December WTI$80 and $75 puts attracting the most volume. There was also a large trade in the December $83 puts that looks to be a seller," said OptionsXpress analyst Michael Zarembski.

Zarembski said the volume in the $80 and $75 puts could mean that option sellers do not believe that December WTI futures will reach these price levels prior to expirations in the December options on November 15th.

"There is a minor support level in the CLZ12 futures [WTI December 2012] at $83.40 so it is possible that the large seller of the $83 puts believes that oil prices will not reach this level by Nov 15th," he said.

Energy stocks were the top advancing sectors Wednesday as the general markets rebounded. Triangle Petroleum (TPLM) was advancing 5.4% to $5.63; Apache (APA) was gaining 4.3% to $98.16; Anadarko Petroleum (APC) was ahead by 4.8% to $81.08; Chesapeake Energy (CHK) was rising 4.4% to $28.20; Williams Companies (WMB) was adding 3.6% to $30.42; Cheniere Energy (LNG) was higher by 1.9% to $11.45; and Royal Dutch Shell (RDS.A) was up 0.8% to $69.37.

-- Written by Andrea Tse in New York.



>To contact the writer of this article, click here: Andrea Tse.

Copyright 2011 TheStreet.com Inc. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.

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