Oil Prices Punch Higher With Stocks

NEW YORK ( TheStreet) -- Oil prices were rallying Friday as market morale improved going into the weekend, when leaders will discuss how to expand the European rescue fund. However, lingering fears threatened to erode risk appetite.

West Texas Intermediate (WTI) light sweet crude oil for December delivery was gaining $2.58 to $88.65 a barrel and the December Brent crude contract was adding $1.81 to $111.57, as the dollar fell 0.6% against the euro and the Dow gained more than 200 points, and the S&P 500 gained more than 20 points.

There's been almost a 96% correlation between crude oil futures and the stock market over the last several months, and on a day-to-day basis, oil traders are often using the S&P 500 as a barometer for where oil prices might be going next. For instance, an S&P 500 bottom of 1070 corresponds with WTI crude at around $75 and Brent at around $99.

"People are feeling more optimism today," says Channing Smith, co-manager at the five-star Capital Advisors Growth Fund. But "it will be interesting to see if it holds through the end of the day."

Eurozone leaders are faced with an intensely complex and challenging task of coming together with a comprehensive plan for preventing the region from sliding into a recession -- and time is running out. "The situation far exceeds what we had to deal with in 2008," said Smith of the eurozone's debt crisis.

"We keep telling clients this isn't going to be solved in couple days. These are very complex issues. You're dealing with 17 euro governments. Each country has its own self-interest in mind."

No one is expecting the eurozone leaders to come up with any firm resolutions during their summit this weekend, but at the minimum the markets expect three critical points to be addressed -- Greek restructuring, the trillions of dollars in recapitalization of systematically important banks and future government debt auctions planned by the European Central Bank.

"All must be addressed," says Smith. "The biggest fear that markets have is that the situation in Europe isn't resolved in an orderly manner. For oil, the key is if there's a messy default of Greece, you can almost rest assured Europe will go into recession and a deep one."

On the other hand, says Smith, if the leaders announce a stimulus plan or plan to increase the growth rate in Europe, this could be bullish for the markets. "European leaders do understand that timing issues are critical."

Tradition Energy's senior market research director Addison Armstrong says he expects more upside for oil prices if they hit $90.72 a barrel. He expects oil prices to stay supported at $84.22.

BGC financial director Roger Volz sees a continuation of more oil gains if prices close at $89. However, a settling price of $85 is a "close for failure."

Oil prices hit a high of $89.69 this week.

Oil prices today were also receiving fundamental support, as longer-term inventory trends began pointing to a work down of supplies. According to Cameron Hanover analysts, crude oil stocks are now 28.3 million barrels lower than a year ago, with stocks at major trading hub Cushing, Okla., 2.9 million barrels lower than last year. However, Cushing stocks are 5.1 million barrels higher compared with two years ago.

"By reducing crude oil imports dramatically, by more than a million barrels per day, refiners managed to generate a large crude oil drawdown in addition to the draws in refined products that had been foretold by last week's refinery utilization decline of 3.5%," they said.

Looking at the U.S. alone, Smith says evidence points not to a deep recession, but rather to a sluggish growth, which isn't detrimental to oil prices. With North America auto sales averaging 15 million to 17 million units from 2000 to 2007, and the likelihood that they will fall at around 13 million this year -- inventories are under control -- and the depressed housing starts and permits, "it's hard to go lower," Smith points out.

British oil giant, BP ( BP) is expected to report third-quarter net income of $5.55 billion next Tuesday, up from $5.53 billion the same time last year.

While Smith thinks BP will be able stretch out liabilities connected to the Macondo oil well disaster, he wouldn't invest in the stock if he were an investor building a portfolio from scratch, given the still unknown associated liabilities. Instead, he would begin with large integrated companies such as Chevron ( CVX) and Exxon Mobil ( XOM). On the other hand, investors who already have a position in BP should hold onto the stock, as it is a "well-run company" with "nice yields," he said.

"If I already had a big oil portfolio, I might want to take a shot at it. You might have situation where the stock languishes because of this uncertainty. Or, you might have what you saw with Anadarko ( APC), where once you see the uncertainty removed, the stock can easily rise."

Energy stocks were gaining ground. BP was advancing 2.1% to $42.18; Anadarko Petroleum was rising 1.6% to $78.14; Apache ( APA) was gaining 2.4% to $93.46; EOG Resources ( EOG) was advancing 3.1% to $90.06; Chesapeake Energy ( CHK) was rising 2% to $27.84; Southern Union ( SUG) was up 0.7% to $41.47; and Triangle Petroleum ( TPLM) was surging 11.7% to $4.97.

-- 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.

If you liked this article you might like

As Gary Cohn Stock Selloff Gets Nasty, Investors Send All Sorts of Assets Lower

As Gary Cohn Stock Selloff Gets Nasty, Investors Send All Sorts of Assets Lower

How to Invest in Oil

How to Invest in Oil

Video: 5 of the Biggest Losers From the New Tax Code

Video: 5 of the Biggest Losers From the New Tax Code

Live From NAPE: Oil and Gas Drillers Excited About $60 Oil

Live From NAPE: Oil and Gas Drillers Excited About $60 Oil