Brent above $100 as ECB rate cut supports risky assets

But global oil demand remains shaky and ample supple weighs on prices

Thu, May 2, 2013, 15:37

Oil rose above $100 a barrel today as an interest rate cut by the European Central Bank supported riskier assets, although a shaky global oil demand outlook and ample supply weighed.

The ECB cut its main interest rate to a record low of 0.50 per cent, supporting equities and the euro. Also US data showed claims for jobless benefits fell sharply last week to 324,000, suggesting the job market is still recovering.

Brent crude rose 65 cents to $100.60 a barrel by 2.38pm after trading as low as $99.51. It fell more than 2 per cent yesterday and has lost almost 10 per cent this year. US crude was 56 cents higher at $91.59.

"Yesterday's sell-off was a bit overdone," said Christopher Bellew, a broker at Jefferies Bache. "I am not quite as pessimistic as everybody else. In general, the Chinese economy is growing and the American economy is better, but sometimes it doesn't happen as quickly as people expect."

He added, "The fact that Brent has gone back above $100 today gives me every expectation we will gradually work our way back to $103-$104."

A survey today showed China's factory-sector growth eased in April, however, suggesting the euro zone recession and sluggish US demand may be weighing on China's recovery. Another survey showed India's factories lost momentum in April.

"In the short term, weak demand prospects will keep oil prices in check," said Carsten Fritsch, an analyst at Commerzbank in Frankfurt. "Prices will struggle to make considerable gains in the current quarter."

While the demand picture is shaky, supplies are strong. Oil output from the Organisation of the Petroleum Exporting Countries rose in April, according to surveys this week.

And weighing on oil prices yesterday, a US government report showed crude stocks in the United States hit a record high of 395.3 million barrels.

Despite bearish developments in oil demand and supply, yesterday’s pledge by the US Federal Reserve to stick to its monetary stimulus plan has provided some support. Investors are waiting for tomorrow’s US non-farm payrolls report for April.

The price drop below $100 has caused concern in some oil-exporting countries such as Iran and Venezuela, but Europe's largest oil company Royal Dutch Shell, which reported earnings today, said it was not worried, given that lower prices will help economic prospects and ease industry cost pressures.

"We're structured around a lower oil price, so it is not bad for us. It might shake (out) a few of the players who have chased the price up and just provide a little bit of a boost for the macro economy," chief financial officer Simon Henry told a news conference.

Reuters