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Oil hits 1-yr high above US$79, eyes equities

OIL prices rose more than 1 percent toward US$80 a barrel yesterday as stronger company earnings raised optimism about the economy, outweighing weak fundamentals.

US crude for November delivery settled up US$1.08 at US$79.61, the highest settlement since October 13, 2008. London Brent crude rose 78 cents to settle at US$77.77.

"We have been tagging along with equities," said Gene McGillian, analyst at Tradition Energy in Stamford, Connecticut. "It comes down to whether or not the fundamentals underlying the oil market itself can justify holding that level."

Oil markets have been looking to equity markets and wider macro economic data in recent months for signs that the economic crisis is easing and energy demand may rebound.

US stocks rose yesterday, buoyed by investor optimism over the strength of earnings season at the beginning of a busy week for corporate results.

The dollar hovered near a 14-month low against the euro as investors bet the Federal Reserve will hold US interest rates near zero, which provided support for oil. A weak dollar makes dollar-denominated commodities like oil cheaper for holders of other currencies.

"The gains were overwhelmingly driven by financials and market optimism rather than fundamentals," said analyst Richard Gorry at JBC Energy in Vienna.

Crude prices have now risen for eight straight sessions and have gained more than 10 percent in October, spurred by a weak US dollar and bullish sentiment across financial markets, interpreted by some oil speculators as outlying indicators for a potential return to demand growth.


MSCI's benchmark all-country world stock index was up around half a percent early on Monday, recovering after investors were disappointed by General Electric and Bank of America on Friday.

Thomson Reuters Proprietary Research shows that with around a quarter of companies in the US S&P 500 index having reported, 79 percent have beaten analysts expectations. In a typical quarter the percentage is 61 percent.

But oil market participants remains mindful that fuel demand is only expected to recover gradually, and that large volumes of oil, including refined products, are now in excess following a contraction in energy use triggered by the financial crisis.

"OPEC spare capacity has reached 6 million barrels per day, refining margins are depressed, OECD demand remains lackluster and the world has yet to come to terms with the massive middle distillate stock surplus. Oil looks a little overblown at US$79," JBC's Gorry said.


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