Crude Oil Rises as Federal Reserve Cuts Rate to Revive Economy

By Nesa Subrahmaniyan

Dec. 17 (Bloomberg) -- Crude oil rose for the first time in four days as stock markets rallied after the U.S. Federal Reserve cut its benchmark interest rate to a record low and pledged to revive the economy.

Oil gained as much as 1.8 percent in New York as Asian equities surged. Yesterday, oil fell on speculation further output cuts by OPEC, supplier of 40 percent of the world’s oil, will be insufficient to halt a slide in prices.

Crude oil for January delivery climbed as much as 90 cents, or 2.1 percent, to $44.50 a barrel, and traded at $44.22 at 10:36 a.m. Singapore time on the New York Mercantile Exchange. Prices have tumbled 70 percent from a record $147.27 on July 11.

“The market’s driven by economic news and anything that’s affecting the demand side is moving oil,” said Gerard Burg, minerals and energy economist at National Australia Bank Ltd. “OPEC’s cut has been priced in and there’s skepticism about their adherence to quotas but any withdrawal of supplies would help.”

Yesterday, futures fell 91 cents, or 2 percent, to $43.60 a barrel on skepticism that OPEC will reduce production targets enough at a meeting today to halt a decline in prices.

Crude oil also rallied today as the dollar declined against the euro and the yen, raising the appeal of commodities as a hedge against inflation.

The dollar fell toward a two-month low against the euro and also traded near the weakest level since 1995 versus the yen.

Russian Help

Saudi Arabian Oil Minister Ali al-Naimi said yesterday that the Organization of Petroleum Exporting Countries should trim output by 2 million barrels a day. The group is seeking the help of Russia, the world’s second-largest crude exporter, to share the burden of cuts.

“OPEC appears to be caught in a ‘catch 22’ situation,” Harry Tchilinguirian, a senior oil market analyst at BNP Paribas SA in London wrote in a report. “An attempt to aggressively boost prices, by pursuing a larger-than-expected cut, could backfire by turning sentiment even more pessimistic on the economy.”

Russia may cut oil production by as much as 400,000 barrels a day as demand shrinks because of the global recession, Kuwait’s Oil Minister said late yesterday.

Russian Deputy Prime Minister Igor Sechin, who is attending OPEC’s meeting in Algeria today, is “promising to act positively,” Oil Minister Mohammed al-Olaim said in an interview with Bloomberg Television. “We think they will seriously do so.”

Excess Supplies

A production cut of 400,000 barrels a day is being talked about by the Russians and they “do think they will have to participate in a cut,” al-Olaim added.

“Realism would suggest that achieving a price floor appears a more feasible proposition than aiming outright for much higher prices given the current economic outlook,” BNP’s Tchilinguirian said.

OPEC members and other producers such as Russia are under increasing pressure to reduce supplies as oil’s $100 a-barrel collapse cuts export revenue, creating budget shortfalls.

“Supply is somewhat in excess of demand, inventories are also higher than normal, therefore to bring things in balance, there will be a cut in production of about 2 million barrels,” Saudi Arabia’s al-Naimi said yesterday.

Falling Consumption

World oil use in 2009 will drop by 0.2 percent to 85.68 million barrels a day, the OPEC secretariat said in a report yesterday. That’s 1 million barrels a day lower than forecast last month. The U.S. Energy Department said on Dec. 9 that global demand will decline 0.5 percent to 85.3 million barrels a day.

The Paris-based International Energy Agency, which coordinates energy policy in 28 developed countries, said in a Dec. 11 report that fuel consumption worldwide will increase by 0.5 percent to 86.3 million barrels a day next year. The IEA depends on data from the International Monetary Fund to make its forecasts.

The global economic slump will prompt the IMF to revise its economic forecasts in January, the group’s chief, Dominique Strauss-Kahn, said Dec. 15 at a conference in Madrid.

Implied volatility for crude oil, the major factor in determining options prices, reached 158.759 Dec. 15, according to data released by Nymex. It was the highest close in Bloomberg data going back to 1986. It’s a gauge of expected price swings.

U.S. crude-oil and fuel supplies have climbed as the recession crimps demand.

Inventories probably rose 600,000 barrels last week, according to the median of 11 responses in a Bloomberg News survey conducted before an Energy Department report today. The report will probably show that supplies of gasoline and distillate fuel, a category that includes heating oil and diesel, also increased.

Brent crude oil for February settlement rose as much as $1.23, or 2.6 percent, to $47.88 a barrel on London’s ICE Futures Europe exchange, and traded at $47.39 at 10:28 a.m. Singapore time. The January contract expired yesterday, after declining 4 cents to $44.56 a barrel.

To contact the reporter on this story: Nesa Subrahmaniyan in Singapore at nesas@bloomberg.net.