August 3rd, 2012

Crude oil surged the most in a month after U.S. payrolls climbed more than estimated and service industries expanded at a faster pace, bolstering optimism about economic strength in the world’s biggest crude-consuming country.

Crude oil futures rose 4.9 percent as payrolls gained 163,000 in July, Labor Department figures showed today in Washington. The Institute for Supply Management’s non-manufacturing index unexpectedly gained. Tropical Storm Ernesto may grow into a hurricane this weekend, the U.S. National Hurricane Center said.

“We had two bits of very positive economic news and the market is reacting,” said Michael Lynch, president of Strategic Energy & Economic Research in Winchester, Massachusetts. “Anything that points to economic growth boosts oil. There’s also the perceived risk from Ernesto, which could strengthen while the market’s closed.”

Crude oil futures for September delivery climbed $4.27 to $91.40 a barrel on the New York Mercantile Exchange, the highest settlement since July 20. It was the biggest gain since June 29. Prices advanced 1.4 percent this week and have dropped 7.5 percent this year.

Brent oil for September settlement advanced $3.04, or 2.9 percent, to end the session at $108.94 a barrel on the London- based ICE Futures Europe exchange. It was the highest closing price since May 16. The European benchmark grade closed at a $17.54 premium to West Texas Intermediate traded in New York.

Payrolls were projected to increase by 100,000, according to the median estimate of 89 economists surveyed by Bloomberg. Revisions to prior reports subtracted a total of 6,000 jobs to payrolls in the previous two months. The jobless rate unexpectedly rose to 8.3 percent.

Crude Oil: Service Industries

The ISM index increased to 52.6, from 52.1 in June, the Tempe, Arizona-based group said today. The median forecast of 73 economists surveyed by Bloomberg called for no change from June. A reading above 50 signals expansion.

The Standard & Poor’s 500 Index (SPX) gained 1.9 percent and the Dow Jones Industrial Average increased 1.7 percent.

The dollar dropped 1.6 percent to $1.2379 per euro. A weaker U.S. currency and stronger euro increase the appeal of raw materials as an investment alternative. The S&P GSCI Index of 24 commodities climbed 2.7 percent, led by crude oil.

The Federal Reserve said Aug. 1 that it will closely monitor the economy and act “as needed” to spur the recovery.

“The unemployment-rate increase is legitimate and may lead to monetary easing,” said John Kilduff, a partner at Again Capital LLC, a New York-based hedge fund that focuses on energy. “It should induce the Fed to take action.”

Draghi Statements

Oil and equities declined yesterday after European Central Bank President Mario Draghi declined to intervene in bond markets. Draghi said the ECB has a plan to re-enter the markets and that new purchases would only complement buying by the European Union’s rescue fund.

“Draghi’s comments yesterday sent markets lower but on further reflection he set up the foundation for a resolution of the crisis in the future,” said Addison Armstrong, director of market research at Tradition Energy in Stamford, Connecticut.

Members of German Chancellor Angela Merkel’s coalition parties signaled they won’t stand in the way of Draghi’s plan to buy government bonds. Spain’s Prime Minister Mariano Rajoy said at a news conference in Madrid today that he would consider asking the euro region’s bailout funds to buy Spanish debt if it was in the best interests of the country.

Oil prices have been supported by unrest in Syria, which is situated in the energy-rich Middle East. The region was responsible for 33 percent of global oil production last year and held 79 percent of proved reserves, according to BP Plc (BP/)’s Statistical Review of World Energy released in June.

Crude Oil: Syrian Unrest

“Syria appears to be blowing up and the ECB may soon announce a rescue of Spain,” Kilduff said. “If either of these occurs, they would send prices soaring.”

Fighting intensified between Syrian forces loyal to President Bashar al-Assad and rebels in several provinces a day after United Nations special envoy Kofi Annan abandoned his effort to mediate a cease-fire. Clashes broke out in Hama, Aleppo, Daraa and the suburbs of Damascus, the Local Coordination Committees in Syria, a rebel group, said in an e- mail.

“The market was trending lower before the release of the numbers and moved sharply higher,” said Stephen Schork, president of The Schork Group Inc. in Villanova, Pennsylvania. “You definitely have to pay attention to the storm forecasts going into the weekend.”
Tropical Storm

Ernesto had top winds of 50 miles (80 kilometers) per hour, up from 45 mph earlier, the hurricane center said in an advisory at 11 a.m. New York time. The storm was 410 miles southeast of San Juan, Puerto Rico, and moving west at 21 mph.

It’s too early to say if the storm’s track will lead it into the Gulf of Mexico. The Gulf region is home to 29 percent of oil production and 40 percent of refining capacity, according to the Energy Department.

Electronic trading volume on the Nymex was 587,817 contracts as of 4:17 p.m. in New York. Volume totaled 581,707 contracts yesterday, 3.8 percent above the three-month average. Open interest was 1.42 million.

- Mark Shenk in New York at Bloomberg.