Oil climbs to $107 before ECB announcement

   on August 02 2012 7:57 AM

Brent crude oil rose to $107 a barrel on Thursday as investors looked to Europe for action to stabilize the euro zone and stimulate an economy in deep recession.

European Central Bank (ECB) President Mario Draghi was due to speak at 8:30 a.m. EDT (1230 GMT) and some reports suggested he might back up his promise last week to do whatever it takes to protect the euro with serious action.

The U.S. Federal Reserve dashed market hopes on Wednesday by deferring any fresh monetary stimulus for the world's biggest economy, although it kept the door open for further bond buying, also known as quantitative easing (QE).

Another round of QE would be likely to support asset prices and could push up commodities and oil.

Brent futures for September rose $1.21 to a high of $107.17 before easing back to trade at $106.75 by 1040 GMT. U.S. crude climbed 36 cents to $89.27.

"Everybody is holding their breath ahead of the ECB," said Eugen Weinberg, global head of commodities research at Commerzbank in Frankfurt. "The most important thing is for the central bank to show that it can control the situation in the euro zone and implement its policies."

Oil prices drew support from several fundamental factors.

U.S. Energy Information Administration (EIA) report showed on Wednesday a drop of 6.5 million barrels in domestic crude oil inventories last week, the largest weekly drawdown since December and far more than the 700,000-barrel drawdown forecast in a Reuters poll.

Maintenance work in the British sector of the North Sea will cut output in September of grades which make up the Brent benchmark for international trade and support prices. News of the supply cuts has helped boost Brent's premium over U.S. crude to $17.53, its highest since May 16.

"Right now there are a few supportive factors in the market which are providing strength to oil: North Sea maintenance is heavier than normal, loss of Iranian barrels and emerging demand from refiners," said Jim Ritterbusch, president of Ritterbusch & Associates in Galena, Illinois.

"This will attract more speculative length and will keep prices elevated."

WAITING FOR ECB

The U.S. Congress overwhelmingly passed a new package of sanctions against Iran on Wednesday that aims to punish banks, insurance companies and shippers that help Tehran sell its oil.

The bill now heads to the White House for President Barack Obama's signature. The United States, European Union, and other Western nations are trying to stop Iran's suspected pursuit of nuclear weapons, while Iran says its nuclear program is for peaceful purposes.

Investors had mixed expectations of the ECB meeting.

Germany's Sueddeutsche Zeitung newspaper reported that Draghi would unveil a two-pronged approach on Thursday, using both the ECB and the future euro rescue fund European Stability Mechanism, to buy bonds from Spain or Italy.

Barclays Capital took a different view:

"The reactivation of SMP (Securities Market Programme) is not in our base scenario; hence, we expect the market to be disappointed," Barclays Capital analysts said in a note.

Spanish bond yields continue to trade at unsustainably high levels, which has Europe on edge that Madrid will require a bailout. Spain, the euro zone's fourth-largest economy, lies at the center of the bloc's debt crisis, as it struggles with a second recession in three years, record unemployment and soaring bills from its regions and banks.

The euro rose to a one-month high against the Swiss franc and was higher against the dollar on Thursday, but uncertainty kept European shares in narrow ranges.  EUR=

"I don't think the market is going to get the kind of proclamations from the ECB that it wants, the fundamental issues in Europe are going to take time to work through," Ritterbusch said.

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