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UPDATE 3-Oil up near $126 ahead of Fed meet

Published: March 13, 2012 | 11:13 am
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* Dollar hovers near 7-wk high versus basket of currencies
* Fed seen unlikely to offer QE3 as U.S. economy improves
* Coming up: U.S. retail sales at 1230 GMT (Recasts, adds fresh quotes, updates prices, previous SINGAPORE)

LONDON, March 13 (Reuters) – Oil prices traded up near $126 on Tuesday as investors awaited comments from the U.S. central bank that may confirm an improving outlook for the U.S. economy but could pour cold water on expectations for further monetary stimulus.

Brent crude was up 51 cents to $125.85 by 0952 GMT, after closing down on Monday for the first time in four sessions. The April Brent contract expires on Thursday. U.S. April crude was up 55 cents at $106.89.

A U.S. Federal Reserve meeting tonight is being closely eyed for clues as to how well the U.S. economy is recovering, and whether this will mean a third round of quantitative easing is off the cards.

“Today it will be watch and wait,” said Bill Hubard, chief economist at Markets.com. Traders and analysts are also looking to the U.S. retail sales data for February, which are due at the start of the U.S. trading day.

If these are up by 1 percent or more, this is likely to boost the dollar, putting commodities under pressure, Hubard said.

The dollar is currently trading sideways against a basket of currencies, although remains near a seven-week high on expectations that the improvement in the U.S. economy will prevent fresh stimulus.

A stronger dollar weighs on commodities priced in dollars as it makes them more expensive for buyers holding other currencies.

“The market appears to be lowering its expectations of a further round of quantitative easing given the generally positive tone of recent U.S. data,” Natalie Robertson, an ANZ analyst, said in a note.

“This could generate some volatility in commodities, and potential downside risks.”

Hubard also expects to see some profit-taking if the U.S. retail sales come in strong enough to forestall QE3.

“If we get a positive number in the U.S. retail sales it will solidify the non-farm payrolls data from last week and that will knock QE3 totally out of the box,” he said.

ELEVATED LEVELS

Oil prices are currently at elevated levels, supported by geopolitical tensions with Iran and an agreement on the Greek bail-out package, as well as the improving economic picture in the United States.

“From a psychological point of view, all these factors are very supportive for the market and the demand outlook,” said Andy Sommer, energy market analyst at EGL.

However, he does not see much upside for Brent from these levels: “Underlying oil demand, especially in the U.S., is still relatively weak. It also looks like the strong Chinese imports are going more into inventories, not actual consumption.”

On the supply side, Libyan volumes are coming back into the market along with incremental Iraqi volumes, he said. “So we see a cap at the front end of the curve. All this keeps Brent trading in a relatively narrow range.”

Escalating tensions between the West and Iran over Tehran’s nuclear programme and supply disruption from Syria, South Sudan and Yemen have underpinned oil prices this year.

A special U.N. Security Council meeting on the “Arab Spring” uprisings on Monday showed the five permanent members were no closer to breaking their impasse over Syria, with Russia and China continuing to back a defiant Assad.

reuters

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