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Oil Nears $85 as Spain Gets Funds to Rescue Banks

by Pablo Gorondi
Monday Jun 11, 2012

The price of oil rose to near $85 a barrel Monday after Europe offered Spain a $125 billion rescue loan for its troubled banks and China significantly increased its imports of crude.

By early afternoon in Europe, benchmark oil for July delivery was up 77 cents to $84.87 per barrel in electronic trading on the New York Mercantile Exchange. Earlier in the session, the contract rose as high as $86.64. On Friday, it fell 72 cents to settle at $84.10.

In London, Brent crude for July delivery was up 93 cents at $100.40 per barrel on the ICE Futures exchange.

Over the weekend, the 17 countries that use the euro common currency pledged to lend Spain funds to bailout out its faltering banks. Oil has dropped from $106 last month on concern over global growth and as Spain's banking crisis threatened to worsen Europe's economic slowdown.

The financial lifeline for Spain helped strengthen the euro to $1.2610 from $1.2507 late Friday in New York. A weaker dollar makes commodities priced in dollars less expensive for investors with other currencies.

"Over the last three months we have seen a significant reemergence of the link between the euro and oil prices," energy trader and consultant The Schork Group said in a report. "Thus, strength in the euro likely means support for oil prices."

Meanwhile, official data showed China imported nearly 6 million barrels of crude oil a day in May, some 10 percent more than the month before and 18 percent more than a year earlier. That helped ease concerns about falling growth and demand in the world's second-largest economy.

"China has clearly taken advantage of the sharp fall in prices in May to replenish its commodity stocks," said analysts at Commerzbank in Frankfurt. "The poorer economic data from China of late had led to expectations of lower import dynamics. China is thus having a stabilizing effect on prices on the oil market."

A warning from Iran that negotiations over its nuclear program could stall also helped raise oil prices. Ali Bagheri, Iran's No. 2 nuclear negotiator, said Western powers must explain what concessions they will offer to Iran in return for a halt to upgrading enriched uranium to weapons grade, according to official IRNA news agency Sunday.

Iran and six world powers are scheduled for talks in Moscow on June 18.

Iran says it is developing a nuclear program for peaceful purposes. In exchange for discussing enrichment, Iran wants the West to ease sanctions which have made exporting its crude more difficult.

Goldman Sachs predicted that decreasing spare supply capacity and the Iran crisis would drive up the Nymex contract to $115 a barrel three months from now and to $125 a barrel by mid-2013.

"Despite the notable slowdown in global economic growth, we continue to expect that oil demand will grow well in excess of production capacity growth," Goldman Sachs said in its Global Commodity Watch report released Monday. "In our view, it is only a matter of time before inventories and OPEC spare capacity become effectively exhausted, requiring higher oil prices to restrain demand, keeping it in line with available supply."

"Further, as tensions between Iran and the West escalate, the risk to crude oil prices is becoming increasingly skewed to the upside."

In other energy trading, heating oil was up 2.21 cents at $2.6942 per gallon while gasoline futures rose 1.83 cents at $2.7035 per gallon. Natural gas slid 3 cents to $2.269 per 1,000 cubic feet.

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