Oil Rises as Equities Rally on Bank-Rescue Plan Speculation

Jan. 21 (Bloomberg) -- Crude oil rose the most in three weeks, following equities higher, on speculation a bank-rescue plan from President Barack Obama will boost financial companies.

Oil climbed as much as 7 percent as stocks rallied on the new president’s plans to complete an assistance program that can be paired with the $825 billion stimulus package. The oil market closely tracked the Dow Jones Industrial Average today. March futures also advanced as traders narrowed the differential to later contracts amid rising inventories.

“There’s been a positive correlation between energy and equities, and this appears to be giving the oil market some support,” said Bill O’Grady, chief markets strategist at Confluence Investment Management in St. Louis.

Crude oil for March delivery rose $2.71, or 6.6 percent, to settle at $43.55 a barrel at 2:44 p.m. on the New York Mercantile Exchange, the biggest gain since Dec. 31. Oil has fallen 2.4 percent since the end of December and is 52 percent lower than a year ago.

February oil rose $2.23, or 6.1 percent, to $38.74 a barrel yesterday, the last day the contract traded, as the spread between it and March crude declined.

The Dow increased 279.01 points, or 3.5 percent, to 8,228.1. The Standard & Poor’s 500 Index rose 35.02 points, or 4.4 percent, to 840.24.

“The strength in the S&P is causing the front oil contracts to rise, and that’s causing the spread to come in,” said Addison Armstrong, director of market research for Tradition Energy in Stamford, Connecticut.

Higher in April

The price for oil for delivery in April is $2 higher than for March, down from a $4.45 premium on Jan. 16. December futures are up $10.09 from the front month, versus $15.04 at the end of last week. This structure, in which the subsequent month’s price is higher than the one before it, is known as contango.

“This was an extension of yesterday’s flattening of the curve,” said Tim Evans, energy analyst with Citi Futures Perspective in New York. “When you look out to 2010 you see that prices were down today. There’s a shift away from the steep contango spread that was based on concern about a glut to something that represents the true cost of carry.”

The spread has encouraged companies to increase stockpiles at Cushing, Oklahoma, where West Texas Intermediate, the grade traded on the Nymex, is stored. Supplies at the hub climbed 2.5 percent to 33 million barrels in the week ended Jan. 9. It was the highest level since at least April 2004, when the Energy Department began keeping records for the location.

Collapsing Contango

“As one and all moved to take advantage of the obvious contango, the trade began and is continuing to collapse under its own weight,” said John Kilduff, senior vice president of energy at MF Global Inc. in New York. “If the unwind continues, we might not see $35 crude oil for a while.”

Prices fell earlier on speculation that the department may say U.S. crude-oil inventories rose last week when it releases its weekly supply report at 11 a.m. tomorrow in Washington, a day later than usual because of the Martin Luther King Jr. holiday on Jan. 19.

The report may show that stockpiles rose 1.4 million barrels in the week ended Jan. 16, according to the median of 14 analyst estimates in a Bloomberg News survey.

“There’s a lot of oil floating around,” said Justin Fohsz, a broker at Starsupply Petroleum, a division of GFI Group Inc. in Englewood, New Jersey. “There’s an overhang, which isn’t going away anytime soon.”

Gasoline stockpiles rose 1.8 million barrels last week, according to the survey. Inventories of distillate fuel, a category that includes heating oil and diesel, probably increased 500,000 barrels.

Gasoline Rises

Gasoline futures for February delivery rose 3.07 cents, or 2.7 percent, to settle at $1.1738 a gallon in New York. Heating oil for February increased 1.02 cents, or 0.7 percent, to end the session at $1.386 a gallon.

The Organization of Petroleum Exporting Countries announced a record 9 percent cut in supply targets at a Dec. 17 meeting to reverse the plunge in oil prices, which have tumbled 70 percent since reaching a record $147.27 a barrel in New York on July 11.

Petroleos Mexicanos, the state-owned oil company, said crude output fell 9.2 percent to 2.799 million barrels a day in 2008, the largest decline since World War II, as production fell at its largest field. Pemex extracted 31 percent less crude last year from Cantarell, the world’s third-largest deposit, according to the company statement.

Brent crude oil for March settlement rose $1.40, or 3.2 percent, to settle at $45.02 a barrel on London’s ICE Futures Europe exchange.

Volume in electronic trading on the exchange was 471,825 contracts as of 3:06 p.m. in New York. Volume totaled 677,969 contracts yesterday, up 42 percent from the average over the past 3 months. Open interest that day was 1.25 million contracts. The exchange has a one-business-day delay in reporting open interest and full volume data.