Oil Advances as Equities Gain After Fed Cuts Rate to Record Low

Dec. 17 (Bloomberg) -- Crude oil rose above $44 a barrel as U.S. stocks climbed to a five-week high after the Federal Reserve cut its benchmark interest rate to a record low and said it will employ “all available tools” to revive the economy.

The Fed cut the main U.S. interest rate to as low as zero for the first time and shifted its focus to the amount and type of debt it buys in an attempt to end the longest slump in a quarter-century. Unemployment rose to 6.7 percent last month, the highest level since 1993, while builders broke ground on the fewest new homes since record-keeping began in 1947.

Crude oil for January delivery rose 71 cents, or 1.6 percent, to $44.31 a barrel at 10:23 a.m. Sydney time on the New York Mercantile Exchange. Prices have tumbled 70 percent from a record $147.27 on July 11.

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.

Futures tumbled after 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, on his arrival in Oran, Algeria. Oil extended its declines immediately after the Fed action.

“OPEC is struggling to cut enough production to deal with slowing demand, and not too much so that they are responsible for a further deepening of the recession,” said Adam Sieminski, Deutsche Bank’s chief energy economist, in Washington.

Excess Supply

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.

“You know that 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,” al-Naimi said.

The producer group is asking Russia to cut production by 400,000 barrels a day and other non-OPEC nations to curb a further 200,000 barrels a day, OPEC Secretary-General Abdalla el-Badri said yesterday in Oran.

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.

Optimistic Forecast

“The IEA said demand will grow next year based on the IMF global economic outlook,” Sieminski said. “It’s almost as if they are apologizing for being stuck with the forecast.”

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.

“The IEA’s optimistic assumption for global oil demand growth in 2009 will likely get clipped severely in January when they adopt the new IMF forecast for 2009 world GDP,” Sieminski said.

Bets that February oil will fall below $40 a barrel were the most active options in New York yesterday. February $40 puts, bets the price will drop below that level, rose 44 cents to $2.77 a barrel, or $2,770 a contract, on volume of 921 lots in Nymex electronic trading. One contract is for 1,000 barrels of oil.

U.S. Supplies

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 fell 49 cents, or 1 percent, to $46.65 a barrel on London’s ICE Futures Europe exchange. The January contract expired yesterday, after declining 4 cents to $44.56 a barrel.