Oil Rises as Traders Purchase Crude Before Contract Expiration

Jan. 20 (Bloomberg) -- Crude oil rose more than $2 a barrel in New York, the most in more than two weeks, as traders purchased futures for February delivery before the contract expired today.

Investors who made bets that February oil would fall further closed out their positions, an action called short covering. The February contract was less expensive than the subsequent month’s price, a condition known as contango. The March through February 2010 contracts are down more than $1.

“There were a lot of shorts holding out for the last day of trading and in the end they had to cover them,” said Peter Beutel, president of Cameron Hanover Inc., an energy consulting company in New Canaan, Connecticut.

Crude oil for February delivery rose $2.23, or 6.1 percent, to settle at $38.74 a barrel at 2:58 p.m. on the New York Mercantile Exchange, the biggest gain since Dec. 31. More than $7 separated the day’s high and low prices. Futures are down 57 percent from a year ago.

Floor trading was closed for the Martin Luther King Jr. holiday yesterday. Electronic trades were booked today for settlement. The more-active March contract declined $1.73, or 4.1 percent, to settle at $40.84 a barrel.

“Now that the February contract has expired, it will be interesting to see if over the next few days the March drops to the February level,” Beutel said.

Rising U.S. stockpiles and forecasts from the International Energy Agency and OPEC for declining world demand contributed to an 11 percent drop in Nymex crude oil last week. Prices are down 13 percent this year, after tumbling 54 percent in 2008.

Inventory Increases

“Given the contango, I would expect us to see further inventory increases for at least a couple weeks,” said Rick Mueller, director of oil markets at Energy Security Analysis Inc. in Wakefield, Massachusetts.

U.S. inventories probably rose 1.5 million barrels last week, the 15th gain in 17 weeks, according to the median of analyst estimates in a Bloomberg News survey. The Energy Department is scheduled to release its weekly inventory report on Jan. 22, a day later than usual because of yesterday’s holiday.

“Nothing is happening in the news today that explains the movement,” said Michael Lynch, president of Strategic Energy & Economic Research, in Winchester, Massachusetts. “All of the movement is due to expiration.”

The oil market needs more speculators to help stabilize prices six months after the traders were blamed for pushing the commodity higher, Deutsche Bank said in a report. A lack of liquidity is distorting prices, particularly for near-term delivery, amid an oversupply of oil at Cushing, said analysts led by Paul Sankey in New York in the report dated yesterday.

Imbalanced Market

“We clearly have a fundamentally imbalanced market, with far too much crude, that needs to be resolved,” the analysts said. “We need more market activity to correct these issues, but for technical, political and financial reasons, the liquidity of the market has dried up and the long-term price of oil is partly distorted.”

Brent crude oil for March settlement declined 88 cents, or 2 percent, to end the session at $43.62 a barrel on London’s ICE Futures Europe exchange.

Two geopolitical crises that bolstered prices earlier this month appear to have been resolved over the long weekend.

Russia and Ukraine signed 10-year natural-gas contracts, ending a dispute that squeezed supplies to the European Union for almost two weeks. Shipments resumed today. More than 20 European countries were affected, as 80 percent of Russian gas exports pass through Ukraine’s pipeline network.

Israeli Pullout

Israel began pulling its troops from the Gaza Strip after it declared a unilateral truce Jan. 18, ending a military operation to stop Hamas and other Palestinian militant groups from shooting rockets into the country. The fighting began on Dec. 27. Concern that the unrest would disrupt Middle East supplies has helped bolster prices this month.

“The Russia-Ukraine gas dispute has been settled, although I don’t know when there will be deliveries in Europe, and Israeli troops are leaving Gaza,” said Nauman Barakat, senior vice president of global energy futures at Macquarie Futures USA Inc. in New York. “Inventories are up and demand is poor. It’s hard to see a silver lining for the bulls.”

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 74 percent since reaching a record $147.27 a barrel in New York on July 11.

Oil may make a “swift and violent rebound” to $65 a barrel in the second half of 2009 as OPEC production cuts take effect and other producers trim output, Goldman Sachs analyst Jeffrey Currie said at a conference in London yesterday.

Volume in electronic trading on the exchange was 615,454 contracts as of 3:07 p.m. in New York. Volume totaled 530,274 contracts on Jan. 16, up 11 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.