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Oil climbs to 1-mth high on China growth, U.S. pipeline

Technicals show U.S. crude above $78.

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September 13, 2010 10:56 by



Oil rose to a one-month high on Monday on strong Chinese demand growth and industrial output, while an extended shutdown of the biggest Canada-U.S. crude pipeline raised expectations of declining inventories.

U.S. crude for October climbed as much as 1.4 percent, or $1.05, to $77.50 a barrel, the highest price since Aug. 12, and was up 97 cents at $77.42 by 0652 GMT. October ICE Brent rose 64 cents to $78.80.

Chinese factories ramped up production by a larger-than-expected 13.9 percent in August, statistics showed on Saturday, as the economy of the world’s second-largest oil user remained buoyant despite government efforts to clamp down on bank lending.

Reflecting accelerating industrial activity, China’s implied oil demand rose 7.4 percent in August from a year earlier, more than twice as fast as in July, with new refineries processing more crude to supply robust fuel consumption.

“The Chinese data was overwhelmingly positive,” said Ben Westmore, a commodities analyst at National Australia Bank.

“China is in a soft landing after all the stimulus, and emerging economies are growing quite strongly. In terms of oil use, that portends strong demand in the coming months.”

Enbridge’s Line 6A, connecting Canadian production with refineries in the Midwest and the pricing hub for the U.S. crude benchmark West Texas Intermediate (WTI) at Cushing, Oklahoma, remained shut following a leak three days earlier.

Although Enbridge found the source of the leak and completed the drain up of the oil late on Sunday, no date was set for restoring flows through the 670,000 barrel per day (bpd) duct, which can carry 7-8 percent of total U.S. crude imports.

“One of the big concerns has been the stocks at Cushing,” Westmore said. “The longer the pipeline is down, the more likely it is that these stocks are going to fall and the market tighten in that area.”

ENVIRONMENTAL OVERSIGHT

Canada is the largest oil exporter to the U.S. and Enbridge’s pipelines carry the lion’s share of that. The shutdown of the company’s biggest line might help ease a glut in Cushing storage.

The leak has the potential to reduce flows to Cushing by around 300,000 bpd, according to JP Morgan, taking into account alternative routes and the fact that Line 6A was probably not being used at full capacity when it leaked.

A section of the pipeline will have to be removed so the repair can be made, the U.S. Environmental Protection Agency said. That section will have to be replaced and inspections done by federal regulators before use of the line can resume.

Heightened environmental scrutiny following BP’s oil spill in the Gulf of Mexico this year has prevented the resumption of flows through a smaller Enbridge pipeline that was also closed because of a leak six weeks ago.

“Such leaks are not unusual, and in normal circumstances we would expect the line to be up and running in a matter of days,” but a rapid restart of the most recently shuttered pipeline is unlikely because of a “lengthy” environmental review process, JP Morgan said in a note to investors.

The bank expects WTI to return to its usual premium to Brent. While the front-month contract traded more than $3.50 a barrel below the European benchmark early last week, on Monday that discount had shrank to less than $1.40.

DUAL CONFIDENCE

The dollar weakened and Asian equities rose after positive economic signs also came from top oil consumer the United States, where wholesale inventories surged the most in two years in July, according to a report on Friday.

“You get this dual effect of more confidence in U.S. oil demand and the fears of a slowdown in emerging economies being allayed,” Westmore said.

Money managers increased net-long crude oil positions on The New York Mercantile Exchange for the first time in five weeks in the week ended Sept. 7, the Commodity Futures Trading Commission said on Friday.

Hurricane Igor strengthened rapidly over the Atlantic Ocean on Sunday, becoming a large and dangerous Category 4 storm, but its forecast trajectory kept it in the Atlantic heading towards Bermuda at least for the next five days, away from oil and gas infrastructure in the Gulf of Mexico.

Behind Igor, the U.S. National Hurricane Center (NHC) said a tropical depression off the southernmost Cape Verde islands was just below cyclone strength, poised to become Tropical Storm Julia at any time.

The NHC was also monitoring a low pressure system over the east-central Caribbean that it said could develop into a tropical cyclone over the next couple of days.

(By Alejandro Barbajosa, Additional reporting by Erwin Seba in HOUSTON and Aizhu Chen in BEIJING; Editing by Manash Goswami)



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