Oil prices rally on US data; differential hits record high

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Oil prices rallied on Tuesday in nervous trade as the market welcomed encouraging US economic data and the differential between New York and Brent crude struck a record, analysts said.

New York's main contract, light sweet crude for July, known as West Texas Intermediate (WTI), gained 76 cents to $98.06 a barrel.

Brent North Sea crude for July jumped $1.26 to $120.36.

The market was earlier rattled by news of spiking Chinese inflation which stoked concern that more monetary tightening could dent energy demand from the Asian powerhouse.

But sentiment was boosted by news that US retail sales fell 0.2 percent in May from April, much better than forecasts for a 0.7-percent drop.

"US crude prices ... bounced back on the back of the slightly better-than-expected US economic data, despite concerns that Chinese attempts to clamp down on inflation will dampen down demand," said CMC Markets analyst Michael Hewson.

"Brent prices, on the other hand, continue to remain resilient as the spread between the two (contracts) continues to widen ... as Middle East turmoil continues to underpin prices."

This week, New York prices have mostly been weighed down by plentiful crude supplies in the key transit port of Cushing, Oklahoma, while Brent oil has found solid support from mounting supply concerns in Libya and Nigeria.

"The spread between Brent crude and WTI has moved to very wide levels which reflect the differing fundamentals of the two markets," said analyst Damien Cox at consultancy EnergyQuote JHA.

"US crude stocks and importantly those at Cushing continue to trend well above average at the moment -- indeed, they're above the upper limit of their average range for the time of year.

"Given a very-well supplied crude market in the US, the European market is looking less so."

Earlier on Tuesday, Brent hit a record premium of $22.79 against the price of New York crude, traders said.

"Brent prices appear to reflect geopolitical risk and world market conditions while WTI is likely to remain isolated from world market events by high stocks in the US," agreed Credit Agricole CIB oil analyst Christophe Barret.

"While in the short term markets appear well supplied, higher Brent prices reflect rising geopolitical risk and possible tensions on world supply/demand balances in the future.

"WTI, more dependent on US mid-continent balances, would remain largely isolated from a tightening in world crude markets."

The oil market had also diverged on Monday as traders balanced expectations of rising Saudi Arabian output with news of a fresh supply outage in Nigeria.

Riyadh, which failed to agree an output boost for the 12-nation Organization of Petroleum Exporting Countries (OPEC) last week, is unilaterally boosting production, according to analysts.

"A unilateral increase in production from Saudi Arabia offered a reminder that Saudi spare capacities could significantly tighten at the end of the year, increasing the danger of production disruptions elsewhere in the Middle East," Barret said.

"As a result, current Brent prices are higher than what would be required by fundamentals as operators want to maintain high stocks to offset part of the risk of further supply disruptions."

© 2011 AFP

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