Oil above $71 on optimism over economic recovery

[October 07, 2009]  VIENNA (AP) -- Oil prices rose above $71 a barrel as increased optimism about a global economic recovery boosted expectations that crude demand will grow.

Benchmark crude for November delivery was up 32 cents at $71.20 by noon European electronic trading on the New York Mercantile Exchange. The contract rose 47 cents to settle at $70.88 Tuesday.

Oil rose together with global stock markets. The Dow Jones industrial average gained a second straight day, advancing 1.4 percent Tuesday, its biggest gain since Aug. 21 as investors bet corporate profits will surge as the global economy recovers. Most Asian and European indexes also advanced on Wednesday.

The rally in stocks came after Australia raised interest rates Tuesday, signaling that policy makers see the country's economy as strong enough to withstand higher borrowing costs. That touched off hopes other economies may also be strengthening enough to unwind stimulus measures including super low interest rates and massive government spending.

"The optimism for economic recovery is driving equities and oil markets," said Victor Shum, an energy analyst with consultancy Purvin & Gertz in Singapore.

The tumbling dollar also appeared to contribute to crude's rise, with traders looking to oil to park their investments as the turn away from the greenback. The U.S. currency was near year lows against the euro Tuesday, in part because of expectations increased interest rates.

Despite denials from countries named, a report in a British newspaper that Arab states, along with China, Russia, Japan and France, were in talks to move away from using the dollar for oil trading also hurt the currency.

Vienna's JBC Energy discounted any such move as "unlikely to happen anytime soon, particularly because many Gulf States and China have their own currencies pegged to the dollar."

"However in the longer term, such a change may be on the cards," said JBC's newsletter.

A report by the American Petroleum Institute showing a surprise fall in U.S. oil inventories last week also lifted prices, he said. Crude inventories dropped 254,000 barrels while distillate fuel stocks fell 2.91 million barrels, he said according to the report late Tuesday.

The report however, contrasted with market expectations for higher inventories.

A survey by Platts, the energy information arm of McGraw-Hill Cos, said crude stock is likely to grow by nearly 2 million barrels and that supplies of gasoline and distillates used for heating oil and diesel also climbed last week.

The official weekly supply report will be released by the Energy Information Administration later Wednesday.

Shum said oil prices will rise further if crude inventories fall. Prices will fall if crude stocks rise but likely to hold above $70, backed by stronger financial markets, he added.

In other Nymex trading, heating oil and gasoline both gained around 1 cent at $1.82 and $1.78 a gallon. Natural gas for November delivery rose more than 6 cents to $4.95 per 1,000 cubic feet.

In London, Brent crude rose 40 cents to $68.96 on the ICE Futures exchange.

[Associated Press; By GEORGE JAHN]

Associated Press writer Eileen Ng contributed to this report from Kuala Lumpur, Malaysia.

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