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Brent over $106 on promise of low US interest rates

Brent over $106 on promise of low US interest rates

Fed promises interest rates near zero over next two years; IEA says oil demand to plunge if slowdown hits; Brent oil to edge down to $100/bbl –technicals;

August 10, 2011 2:06 by



Brent crude climbed above $106 a barrel on Wednesday after the U.S. Federal Reserve’s promise to extend near-zero interest rates for two more years weighed on the dollar and helped reverse a steep fall in oil.

The Fed’s unprecedented step prompted investors to get back into riskier assets priced in dollars, with world shares clawing back more ground after a run of heavy losses.

Brent crude for September was up $3.95 to $106.50 a barrel by 1112 GMT, down from earlier highs of $107.11 a barrel. Prices had flirted with intra-day lows of around $98.70 a barrel in the previous session.

U.S. oil rose by $3.27 to $82.57 a barrel by the same time, after plumbing session-lows on Tuesday of $79.30 a barrel.

Some analysts warned that despite the initial enthusiasm prices could moderate later in the week as attention again focuses on the prospect of flaccid growth.

“The impact of the Fed move will likely fade by week’s end,” MF Global analysts wrote in a note. “The Fed’s move to keep rates depressed for so long is likely because the central bank realises that growth will be tepid for some time to come. This scenario does not bode well for commodities, especially base metals and energy.”

The U.S. dollar’s index against a basket of currencies stayed under pressure after the announcement, down 0.94 percent by 0938 GMT.

“Given that there is enough evidence that the U.S. is in a soft patch it is not like anybody was expecting them to raise rates soon,” Petromatrix’s Olivier Jakob said. “The Fed also mentioned that it is prepared to use other tools as appropriate and that is translated by many that QE3 is on its way…We remain therefore cautious in reading the late market rebound too optimistically”.

The rebound in crude prices saw investors brush off a drop in July implied crude imports in the world’s No. 2 consumer, China.

‘FRAIL PILLARS’

The International Energy Agency warned that global oil demand growth could more than halve if the global economy grew slower than expected in 2012.

The agency, which advises industrialised nations on energy policies, said that although it did not make big changes to its oil demand growth estimates for 2011 and 2012 despite a global economic storm, it was very dependent on how the global economy performs in the months to come.

Bank of America Merrill Lynch analysts fired the latest salvo in a wave of bearish remarks on the global economy, noting the latest data highlights a worldwide slowdown is under way and that the economy stands on ‘very frail pillars’.

“The deceleration in U.S. and European economic data suggests that a global economic slowdown has already been unfolding over the past two months,” the analysts said in a note. “Leading indicators point to a further cyclical deteriorating ahead. Adding the current uncertainty linked to the U.S. downgrade and the European debt crisis, we find that the global economy is standing on very frail pillars.”

CHINESE OIL DEMAND

Imports of crude to China during July hit a one year low on a daily basis. Customs data showed it brought in 19.43 million tonnes, or 4.58 million barrels per day (bpd), last month, up 2.5 percent from a year earlier, but down 1.4 percent from June.

China’s implied oil demand rose 7.7 percent over a year earlier, picking up from June, which marked the slowest growth in more than two years, according to Reuters calculations.

The Organization of the Petroleum Exporting Countries and the U.S. Energy Information Administration cut demand growth forecasts for 2011 in separate monthly reports.

On the inventory front, the American Petroleum Institute said on Tuesday that weekly U.S. domestic crude stocks fell 5.2 million barrels.

That compares with an expanded Reuters poll that forecast crude stockpiles to have risen for the third straight time last week as releases from the Strategic Petroleum Reserve kept moving into commercial inventories.

Ahead of the U.S. Energy Information Administration’ (EIA) own data at 10:30 a.m. EDT, a Reuters poll of 12 analysts shows an expected build in crude stocks for the week to Aug. 5, with the average forecast coming in at 1.5 million barrels.

By Zaida Espana

(Additional reporting by Manash Goswami in Singapore; Editing by Alison Birrane)



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