Oil rebounds towards $89

Oil rebounded towards $89 today as the dollar weakened and some optimism returned to stock markets in Asia on hopes that the extension of US tax cuts would boost consumption.

US crude for January rose as much as 1 per cent to $89.20 a barrel and was up 86 cents at $89.14 a barrel at 0743 GMT. The front-month contract touched a 26-month high of $90.76 on Tuesday and fell 41 cents yesterday, pulled lower in part by concerns about a growing US deficit.

ICE Brent crude added 59 cents to $91.36.

The financial world is becoming split between investors who are deeply concerned that a proposal from US president Barack Obama to extend tax cuts will worsen a budget shortfall, and investors who are relieved that US authorities are trying to use fiscal and monetary medicine for the economy.

Oil markets over the past 24 hours have shifted from focusing on the first scenario to paying more attention to the rosier picture painted by the second one.

"When you have rising stock markets, you have the wealth effect; consumers feel richer so their pocket books open up. That's also positive for oil demand," said Tony Nunan, a risk manager with Tokyo-based Mitsubishi Corp.

"People are now more comfortable with the overall economic picture. This is a buying opportunity."

A rising trend has been confirmed for US crude from a technical perspective, Mr Nunan said, adding: "I thought that at $90 it was going to struggle and it would become some resistance, but it just whooshed through it."

The front-month contract on Tuesday for the first time surpassed $89.84, the 50 per cent Fibonacci retracement from the July 2008 record of $147.27 to the December 2008 low of $32.40. Although prices fell later in the day, the correction was limited.

A report that inflation in China in November was lower than expectations of 4.7 per cent in a Reuters poll also reassured markets that an interest rate increase by the world's second-largest oil consuming economy may not be in the offing.

“The worry over that to me seems to be a little bit unfounded. For me, that is the right thing to do, the concern is that they would overdo it," Mr Nunan said.

China's annual inflation in November is likely to have been "a little bit" higher than October's 4.4 per cent, but will be lower than market expectations, the official Securities Times reported, citing unnamed authoritative sources. The statistics will be published on Saturday.

The Standard and Poor's 500 Index yesterday closed at its highest level since September 2008, while Japan's Nikkei average today climbed to a fresh seven-month high.

A bigger-than-expected 3.8-million-barrel drop in US crude stockpiles last week also contributed to the gain in prices.

Total US crude and product stocks fell last week by 5.3 million barrels to 1.110 billion barrels, and are down 3 per cent from 20-year highs in September, the Energy Information Administration (EIA) said today.

Total US oil product demand over the past four weeks was up 2.9 per cent from the same period last year, with distillate demand up 5.3 per cent and gasoline demand down just 0.7 per cent.

Still, inventories of refined products rose last week as refineries produced more fuel, according to weekly data from the EIA. Gasoline rose by 3.8 million barrels and distillates by 2.2 million, despite colder-than-normal weather in the Northeast.

Tighter supplies in the US, and oil prices near 26-month highs, could come to bear on Opec members who meet this week to discuss whether current oil output is high enough to meet demand as world economies rebound.

But the Organisation of the Petroleum Exporting Countries appears unlikely to raise oil supply limits to cap an oil price rally when it meets in Quito on Saturday, with ministers insisting world economic growth can hold up with crude at $90 a barrel.

"My expectation is that Opec will do nothing again. They are doing their job," Mr Nunan said.

Reuters