Oil Prices Surge on Eurozone Confidence

(Story updated with oil trader reactions to Wall Street protests and recent prices)
NEW YORK (TheStreet) --Oil prices charged higher Friday on a combination of renewed confidence in the resolution of the European debt crisis, a strong read on U.S. consumer spending, and a bullish Goldman Sachs report.

The December Brent crude contract was advancing $3.09 to $112.29 a barrel and West Texas Intermediate (WTI) light sweet crude oil for November delivery was adding $2.74 to $86.97, as the dollar slipped 0.6% against the euro.

The typical discount of $23 that WTI has been trading against Brent widened to $25 Friday after the Dow Jones-UBS Commodity Index said this week it will add Brent crude to its index starting in 2012.

Crude oil prices were 13% above the lows of early last week after the markets received a boost of confidence from news that some officials from the Group of 20 leading economies were thinking of bolstering the International Monetary Fund's lending capacity in order to help stabilize the eurozone's debt crisis. Also encouraging was news that U.S. retail sales rose 1.1% in September, significantly stronger than the consensus call for a 0.7% increase.

These positive developments offset news that Standard & Poor's downgraded Spain's long-term sovereign credit rating to AA- from AA.

"European officials are ironing out a plan to shore up the European economy to halt the spreading of the debt crisis -- including 'increased firepower' -- surreal amounts of cash from the IMF ... and U.S. Retail sales data came in better than expected," says Matt Smith, an analyst at Summit Energy, a subsidiary of Schneider Electric. "Pop goes the rally."

Oil was also enjoying a risk premium stemming from ongoing tensions between the top oil-exporting nations of Iran and Saudi Arabia.

Also lifting prices was an analyst report form Goldman Sachs saying that crude oil conditions right now are tight and similar to those of the bull market of 2007, which led to WTI prices soaring to $145 a barrel.

"Global OECD (the Organization for Economic Cooperation and Development) inventory levels are falling, rapidly," the Goldman Sachs report said.

The report said that the latest inventory data from Europe, the U.S. and Japan suggests that total inventories are now 31 million barrels below their five-year seasonal average, and in absolute terms, crude inventories are back at their 2006 levels.

"This move is more dramatic if we strip out the impact of the IEA release of strategic inventories that took place through July and August, which would put total inventories 69 million barrels below their seasonal average."

PFGBest senior energy analyst Phil Flynn says those that want to follow the intraday trend would be a buyer of the WTI-Brent spread below $26. This would be an aggressive bid on the spread.

Flynn says that those looking for the spread to top out amid the bullish momentum should aggressively short the spread at $27. "If the spread went to $27, you would see some profit taking."

Flynn adds that while many have dismissed WTI as the global benchmark for crude oil prices, it will be useful to look at both WTI and Brent in the coming years.

"The death of the WTI as a global benchmark has been greatly exaggerated ... dismissing the WTI is premature," said Flynn. "All the people jumping on the Brent bandwagon as a global leader may run back to the WTI a year or two down road the road. Some of their problems i.e. pipeline infrastructure are more easily fixed than problems in the North Sea."

Natural gas prices were up 17.2 cents to $3.703 per million British thermal units -- despite the previous day's bigger-than-expect storage injection numbers -- as the commodity followed crude oil prices higher.

"Colder weather forecasts and a surging crude oil market ... all helping to press natty higher too, despite a storage estimate for next week of +110 to +120 billion cubic feet ," says WeatherBELL Analytics' energy analyst Alan Lammey.

Lammey says the major area of support for natural gas has been between $3.35 and $3.45.

"Now that we've arrived at this level, there are a lot of hedge funds and large speculators that are covering shorts and no real wave of new sellers at this level, so it is hard to move it lower at current," he added. "The market can still try again at testing the $3.40 into next week, particularly given the fact that the preliminary storage number for next week is somewhere in the neighborhood of 110 billion cubic feet to 120 Bcf. But again, just like I said before... there's not a whole lot of downside left here."

Friday's action comes after a major confrontation between Occupy Wall Street protestors and authorities seemed to have been averted after New York City officials opted to postpone the cleanup of the protestors' camp site in Zuccotti Park near Broadway, although there were still clashes between members of the movement and police.

TAC Energy trader Mark Anderle said he doubts the protests will have any direct impact on the energy markets - "most of the trading is done away from the floors now anyhow ... what I think is more important is the manifestation of a generally negative social mood, which seems to have been building in this country for some time now."

"I believe that there are many more people who would love to protest Wall Street or the Fed or Congress, etc., and probably have much better arguments for doing so than the current group," Anderle said. "The reason you don't see these people protesting -- yet -- is that they have a job."

MF Global senior energy markets strategist Richard Ilczyszyn weighed in on the protests as well, saying: "I love this country! If you want to protest you have that right," adding "in this case I think the protesters are in the wrong state and city -- Washington D.C. baby."

"I think the protestors have a right to protest, but they should allow the city to clean up the area," added Flynn of PFGBest. "They could take a break and come back to a clean park! Besides a few of them might need to shower anyway."

Chevron ( CVX) was gaining 2.1% to $99.82; Hess ( HES) was adding 3.7% to $57.12; Occidental Petroleum ( OXY) was advancing 3.5% to $84.35; Marathon Oil ( MRO) was rising 2.5% to $24.24; Devon Energy ( DVN) was increasing 2.3% to $60.42; Carrizo Oil & Gas ( CRZO) was rallying 8.8% to $25.04; and Brigham Exploration ( BEXP) was gaining 3.9% to $29.79.

-- Written by Andrea Tse in New York.

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

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