Oil Prices Rebound on Euro Recovery

NEW YORK ( TheStreet) -- Oil prices were rebounding on a strengthening euro spurred by a better-than-expected auction of Italian 12-month bills and market chatter about the European Central Bank's active involvement in purchasing Spanish and Italian government debt.

Light sweet crude oil for August delivery was up $1.13 at $96.28, while Brent futures for August delivery were trading sideways at $117.30 a barrel.

The U.S. dollar was trading sideways against a basket of major currencies at $75.95, while the euro was down 0.2% to $1.4002, paring losses.

The move comes against serious headwinds. Oil futures have seen three consecutive days of losses because of global economic worries after China -- the world's biggest energy consumer -- raised a key interest rate for a third time in 2011. The lingering U.S. budget debate and resurgent fears of European debt contagion also weighed on sentiment.

"The move into positive territory by WTI seems to be related to the paring of losses for the euro and equities," says Summit Energy analyst Matt Smith, adding that the U.S. market may also be shifting its focus to the Wednesday's weekly Department of Energy inventory report, which is pointing to a sizable drawdown in crude stocks.

"Today's play looks like 'buy WTI in anticipation of a decline in U.S. commercial crude stocks for last week,'" Citi Futures Perspective Energy analyst Tim Evans said.

Smith comments that the recent selloff in crude has been "much more vicious" for WTI, with the spread between it and Brent reaching a new record at $22. Tuesday's action appears simply to be a reversal of some of this price action, he said.

Smith notes that the spread between the two remains extremely volatile.

Brent crude prices were paring losses on speculators taking advantage of thin intraday volumes.

"The primary driver on Brent is hot money chasing a thin market," says Citi futures perspective energy analyst Tim Evans. "The Brent-WTI spread is going in and out like an accordion depending on whether the speculative trade flow is buying or selling Brent."

MF Global analyst Ed Meir notes that a bit of a recovery in the euro seems to have stabilized activity across the commodities markets, with metals bouncing back as well.

David Song, currency analyst at DailyFX research desk, says the sharp rebound in the euro is coming on the back of market rumors that the European Central Bank was actively buying Spanish and Italian government debt, although a spokesperson for the bank has refrained from commenting on the report.

"At the same time, it seems as though European policy makers are a step closer in reaching a credible bailout plan for Greece, but the relief rally in the Euro could be short-lived given the heightening risk for contagion," says Song. "Nevertheless, the U.S. dollar is certainly struggling to hold its ground as there appears to be a rebound in risk-taking behavior, but market conditions may turn around later today should the FOMC policy meeting minutes strike a dour outlook for future growth."

Natural gas futures for August delivery were up 0.4% to $4.306 a million British thermal units as hot weather forecasts continue to support expectations of robust air conditioning demand.

"We seem to be getting the heat, the forecast and the technical help all at the same time," say Cameron Hanover analysts. "Any buying, though, could be interrupted this week by the Energy Information Administration report, which should show a bigger build than last year."

The EIA's weekly natural gas storage report will be published at 10:30 a.m. ET Thursday.

"Looking at the six-to-10 day outlook, it couldn't really be much more supportive for cooling demand, as we approach the peak of summer. There's a few minimal squalls on the hurricane front, but nothing to worry prices, leaving natty to find a bit of buying interest on the extreme heat," Summit Energy analyst Matt Smith says.

Shares of oil and gas companies were mostly flat.

Oil giant Chevron ( CVX) was rising 0.3% to 104.70 after announcing expectations that second-quarter earnings will be higher than those of the first quarter as the company benefits from higher crude oil prices and improved margins. Suncor Energy ( SU) was trading sideways at $39.55, Triangle Petroleum ( TPLM) was gaining 1.2% to $6.86 and Kodiak Oil & Gas ( KOG) was adding 3.2% to $6.21.

Chesapeake Energy ( CHK) was up 0.2% to $29.81 following reports that the company plans to allocate at least $1 billion over 10 years to a new venture to support the use of U.S. natural gas amid a glut that has driven down prices.

Gastar Explorations ( GST) was gaining 2.3% to $3.53 and Atmos Energy ( ATO) was up 0.2% to $33.72.

-- Written by Andrea Tse in New York.

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