Oil Climbs to Three-Week High on Optimism About U.S. Economy

July 24 (Bloomberg) -- Crude oil climbed to a three-week high on optimism that the U.S. economy is strengthening and that fuel consumption will rebound later this year.

Oil increased 7.1 percent this week, the biggest gain since May, as companies such as EBay Inc. and Ford Motor Co. posted better-than-expected earnings. Yesterday, the Standard & Poor’s 500 Index rose to the highest level since President Barack Obama was elected on Nov. 4. Stocks fluctuated today.

“We continue to look to the S&P 500 to interpret any economic data,” said Tim Evans, an energy analyst with Citi Futures Perspective in New York. “It doesn’t matter if it’s earnings, employment or consumer sentiment, oil seems to follow what the S&P does these days.”

Crude oil for September delivery rose 89 cents, or 1.3 percent, to $68.05 a barrel at 2:50 p.m. on the New York Mercantile Exchange, the highest settlement since July 1. Futures are up 53 percent this year and down 54 percent from a record $147.27 reached on July 11, 2008.

Gasoline for August delivery increased 0.27 cent to end the session at $1.9159 a gallon in New York, the highest settlement since June 29. Heating oil for August delivery climbed 1.69 cents, or 1 percent, to $1.7813 a gallon, the highest close since June 29.

Federal Reserve Chairman Ben S. Bernanke said at a House Financial Services Committee hearing today that the central bank is “winding down” emergency measures established to end the financial crisis.

Correlation With Equities

“There’s a belief that any signs of economic growth are good for both fuel demand and equities,” said Bill O’Grady, the chief market strategist for Confluence Investment Management in St. Louis. “We are seeing a correlation between oil and equities, which is not the norm historically.”

Oil has increasingly moved in tandem with benchmark stock indexes. The Dow Jones Industrial Average and U.S. crude futures showed a correlation of 0.7 the past month, up from 0.06 in December, according to data compiled by Bloomberg. A correlation of 1 means the two moved in lockstep.

“We will probably see a decoupling of the oil and equity markets, with oil moving lower,” said Jim Ritterbusch, president of Ritterbusch & Associates, a Galena, Illinois, energy consultant. “We don’t usually see a strong correlation between the stock market, oil and the dollar, but that’s been the case this year.”

U.S. Stockpiles

Crude-oil supplies dropped 1.8 million barrels to 342.7 million last week, an Energy Department report on July 22 showed. The reduction left nationwide crude stockpiles 7.3 percent higher than the five-year average for the period.

Gasoline inventories climbed 813,000 barrels to 215.4 million last week, the sixth-straight gain, according to the report. Stockpiles of distillate fuel rose 1.22 million barrels to 160.5 million, the highest since January 1985.

“This week’s rally has been primarily based on bubbling sentiment that the economy will recover,” said Gene McGillian, an analyst and broker at Tradition Energy in Stamford, Connecticut. “Some of the earnings this week point to a recovery. The oil-market fundamental picture, though, isn’t looking supportive.”

Brent crude for September settlement on London’s ICE Futures Europe exchange rose $1.07, or 1.5 percent, to end the session at $70.32 a barrel. It was the highest settlement price since June 29.

OPEC Shipments

The Organization of Petroleum Exporting Countries will trim shipments by 1.7 percent in the four weeks ending Aug. 8 as refinery maintenance and faltering demand encourage members to implement supply cuts, consultant Oil Movements said yesterday.

OPEC will reduce exports in the period to 22.39 million barrels a day from 22.78 million a day in the month ended July 11, the tanker-tracker said. It’s the sixth consecutive drop reported in Oil Movements’ weekly reports.

Oil may decline next week because of fuel-supply increases and demand that trails earlier years. Twenty-two of 42 analysts surveyed by Bloomberg News, or 52 percent, said futures will fall through July 31. Nine respondents, or 21 percent, forecast that prices will be little changed, and 11 expected a gain.

Total U.S. daily fuel demand averaged 18.6 million barrels in the past four weeks, down 4.8 percent from a year earlier, the July 22 Energy Department report showed.

Crude oil volume in electronic trading on the Nymex was 350,396 contracts as of 2:58 p.m. in New York. Volume totaled 608,957 contracts yesterday, 20 percent higher than the average over the past three months. Open interest was 1.18 million contracts yesterday. The exchange has a one-business-day delay in reporting open interest and full volume data.