LONDON: Brent crude oil futures rallied to over $109 on Friday, helped by a weaker U.S. dollar and after posting steep losses in the previous session, but analysts and traders said the risk remained to the downside given the economic weakness in Europe.
Brent crude was up $1.52 at $109.74 a barrel by 1242 GMT after closing down $3.66 in the previous session. US crude oil futures were up $1.13 to $99.95.
But analysts and traders were skeptical about how long the rally would last. Christophe Barret, oil analyst at Credit Agricole CIB, said that the market seemed to be following movements in the U.S. dollar which was down 0.91 percent against a basket of currencies at 1243 GMT.
The euro jumped to session highs on speculation that the European Central bank may start lending funds to the IMF.
"We are very well bid on the euro – the ECB has been buying Italian debt – and we are seeing buying in crude oil and gasoil," said Rob Montefusco, a trader at Sucden Financial.
Carsten Fritsch, an analyst at Commerzbank in Frankfurt, said the price rise was also partly related to position squaring ahead of the weekend, and the risk was still to the downside because of the eurozone debt crisis.
"Bond yields will be the most important factor to watch again today," he said.
Markets are worried about borrowing costs rising to unsustainable levels for nations such as France and Spain, even as Italy pledged to embark on fiscal reforms.
Fritsch said the German media was reporting that the European Central Bank buying program would be limited to €20 billion a week.
"If that is not considered enough to stabilize the bond yields of Spain and Italy, then the yields could spike higher again and increase risk aversion, putting pressure on oil prices as well," he said.
Spain’s borrowing costs at a sale of 10-year debt soared to their highest in the euro’s history on Thursday.
Speaking in Frankfurt on Friday, ECB chief Mario Draghi reiterated that downside risks to the eurozone’s economic outlook had increased, and expressed his exasperation that the EFSF rescue fund was not yet operational.
The uncertainty about how quickly the eurozone will get to grips with its problems prompted ANZ to join the ranks of banks cutting their forecasts for the spread between European benchmark Brent and US oil to an average of about $5 a barrel over the next 12 months.
The spread has sharply narrowed from $28 in mid-October and was at $9.58 at 1246 GMT on Friday as investors assessed the prospect of the U.S. economy recovering more quickly than Europe’s.
Tony Machacek, a trader at Jefferies Bache, said the bounce in Brent had to be put into context of the week’s activity.
"We have had a severe sell-off all week and Thursday was probably the biggest move to the downside," he said. "It’s the usual economic doom and gloom – all eyes seem to be on the eurozone. Economic slowdown is the main mover of the markets."
He added that the backwardation in Brent – where prompt prices are higher than those further along the futures curve – was coming in, which suggested demand for Brent had slipped.
"In the nearby spreads the backwardations have nigh on disappeared," he said. For January/February it is currently at about 16 cents, but Machacek said it was up at around $1 a few days ago.
"That’s where the trade players are active – in the calendar spreads. So if backwardation is starting to disappear it suggests a lack of demand for actual crude."
Brent’s 12-month backwardation is trading at around $3, the lowest since August 2011.
Despite the weakness in developed markets, Saudi Aramco’s chief executive Khalid Al Falih said this would not dent overall global demand for oil.
Speaking at a conference in Moscow, the head of Saudi Arabia’s national oil company, Khalid Al Falih said demand would grow because of demographic growth and economics in Asia. –Additional reporting by Manash Goswami