Crude Oil Extends Gains as Rate Cuts May Stimulate Fuel Demand

By Mark Shenk and Samantha Zee

Oct. 30 (Bloomberg) -- Crude oil extended gains in New York amid signs that central bank interest-rate cuts may help stimulate fuel demand.

Oil advanced, after rising 7.6 percent yesterday, on forecasts that the U.S. Federal Reserve rate cut will help spur a recovery in the world's biggest fuel-consuming country. China lowered rates and the European Central Bank may reduce them next week. Prices also climbed as the dollar fell the most against the currencies of six major U.S. trading partners since 1998.

``There's renewed optimism'' in the wake of the rate cut, said Antoine Halff, head of energy research at Newedge USA LLC in New York. ``It shouldn't be a surprise that there's a correction after the very steep drop in prices over the last month.''

Crude oil for December delivery rose as much as 91 cents, or 1.4 percent, to $68.41 a barrel. It was trading at $68 at 7:45 a.m. Singapore time on the New York Mercantile Exchange. Yesterday, crude oil jumped $4.77 to settle at $67.50 a barrel, the biggest gain since Sept. 22.

Oil prices, which have tumbled 54 percent since reaching a record $147.27 on July 11, are down 28 percent from a year ago.

The Federal Reserve lowered its benchmark interest rate by half a point to 1 percent yesterday, matching a half-century low.

``Energy markets are moving on exogenous factors, such as equity and currency markets, not the energy fundamentals,'' said Nauman Barakat, senior vice president of global energy futures at Macquarie Futures USA Inc. in New York.

`Bold Measures'

The euro rose against the dollar after Chancellor Angela Merkel said Germany will announce ``bold'' measures to bolster the economy. The Canadian dollar gained the most in at least 37 years as its U.S. counterpart weakened and commodities climbed.

ICE Futures' Dollar Index, which tracks the currency against the euro, the yen, the pound, the Canadian dollar, the Swiss franc and the Swedish krona, fell 2.3 percent, the biggest decline since 1998.

Investors often purchase crude oil and other dollar-priced commodities when the U.S. currency drops because of their use as an inflation hedge.

U.S. inventories of crude oil and distillate fuel, a category that includes heating oil and diesel, rose last week, an Energy Department report yesterday showed.

Crude oil stockpiles climbed 493,000 barrels to 311.9 million barrels in the week ended Oct. 24, the department said. A 1.55 million-barrel gain was forecast, according to the median of 12 analyst estimates before the report.

Fuel Stockpiles

Distillate inventories rose 2.33 million barrels to 126.6 million barrels last week. Analysts forecast that supplies increased 1.05 million barrels. Gasoline stockpiles dropped 1.51 million barrels to 195 million barrels, the first decline in five weeks. A 1.5 million-barrel gain was forecast.

U.S. fuel demand during the past four weeks averaged 18.9 million barrels a day, down 7.8 percent from a year ago, the report showed. Gasoline consumption was down 3.4 percent at 8.9 million barrels a day over the period.

Demand for residual fuel, a category that includes heavy fuel oil, averaged 436,000 barrels a day during the period, down 31 percent from a year earlier. Some manufacturers and utilities can switch between residual fuel and natural gas depending on costs. The department measures shipments from refineries, pipelines and terminals to calculate demand.

OPEC Action

The Organization of Petroleum Exporting Countries will ``probably'' cut crude-output quotas a second time to avoid the growth of inventories, Venezuelan Oil Minister Rafael Ramirez said in an interview on state television.

OPEC reduced its production target by 1.5 million barrels a day after meeting Oct. 24. Ramirez said the group would analyze the reaction of the oil market between that cut and a planned Dec. 17 meeting.

Russia, the world's second-biggest oil producer after Saudi Arabia, should consider joining OPEC, Leonid Fedun, deputy chief executive officer of OAO Lukoil, told a conference in Moscow yesterday. Lukoil is Russia's second-biggest oil producer.

``We will eventually return to trading on the supply-demand fundamentals,'' said Steve Maloney, a risk-management consultant for Stamford, Connecticut-based Towers Perrin. ``As demand returns, supply will tighten and put upward pressure on prices.''

To contact the reporters on this story: Mark Shenk in New York at mshenk1@bloomberg.net; Samantha Zee in Los Angeles at szee@bloomberg.net.