Forexpros – Crude oil prices soared by the most in three years on Friday, logging an almost 10% gain as investor appetite for risk returned to the market on news European leaders had agreed on new measures to tackle the region’s ongoing sovereign debt crisis.
On the New York Mercantile Exchange, light sweet crude futures for delivery in August settled at USD85.02 a barrel by close of trade on Friday. Earlier in the day, prices hit USD85.30 a barrel, the highest since June 18.
For the week, oil rose 5.72%. Monthly and quarterly, however, prices lost 1.8% and 18%, respectively.
Oil futures surged 9.4% on Friday, the largest one-day decline since March 2009 after European leaders unexpectedly reached an agreement on measures to help resolve the ongoing debt crisis in the euro zone.
After a two-day summit in Brussels, European Union leaders agreed to use the euro zone’s bailout funds to support struggling banks directly, without adding to national debt and also agreed to set up a joint banking supervisory body for the euro area.
In addition to the direct recapitalization of Spain’s banks, euro zone bailout funds will be able to purchase government debt in order to keep down borrowing costs.
Also, loans made to Spain by the ESM won’t have senior status, potentially reassuring other creditors.
EU leaders also agreed to devote EUR120 billion in stimulus to encourage growth and create jobs.
Announcing the deal, EU Council President Herman Van Rompuy called the accord a “breakthrough” and said it would break the “vicious circle” between banks and national governments.
The news surprised investors, who were worried the summit would produce statements of good intentions but little in the way of policy.
Following the announcement, the yield on Spanish 10-year bonds fell back to 6.32%, after rising to the critical 7% level on Thursday, while the yield on Italian 10-year bonds eased back below 6%.
The euro posted its largest one day gain against the greenback since October, while the dollar index, which tracks the performance of the greenback against a basket of six other major currencies, lost 1.4% to settle at 81.71 by close of trade Friday, the lowest since June 20.
Oil prices typically strengthen when the U.S. currency weakens as the dollar-priced commodity becomes cheaper for holders of other currencies.
Energy prices fell sharply on Thursday, with crude prices hitting an eight-month low of USD77.30 on concerns European leaders would fail to produce a breakthrough at the EU summit.
There are worries that the region’s worsening sovereign debt crisis could trigger a broader economic slowdown that would curb demand for oil.
Despite Friday’s optimism, market analysts warned that questions remain over the effectiveness of the measures, while emphasizing that they do little to address the root causes of the euro zone’s debt crisis.
Oil prices found further support ahead the start of a European Union oil embargo on imports from Iran due to begin July 1.
A potential loss of Iranian oil supplies helped underpin strong gains in oil prices during late last year and the first quarter of this year.
But prices are down nearly 22% from this year’s high in March, as the market took into account assurances from Saudi Arabia that it would make up for any supply shortfalls against the potential risk for the loss of oil from Iran.
Despite Friday’s 10% gain, oil prices still tumbled 18% in the March-June period, the worst quarterly loss since the fourth quarter of 2008, as prices were dragged lower by negative developments regarding the euro zone’s ongoing debt crisis and fears over a slowdown in global economic growth.
Elsewhere, on the ICE Futures Exchange, Brent oil futures for August delivery settled at USD97.62 a barrel by close of trade on Friday. Prices hit USD98.25 a barrel earlier in the day, the lowest since June 18.
The Brent contract rallied 6.35% over the week, while the spread between the Brent and the crude contracts stood at USD12.60 a barrel by close of trade Friday.
London-traded Brent prices lost nearly 20% on the quarter, the biggest decline since the final three months of 2008.
In the week ahead, investors will be closely watching the outcome of the European Central Bank’s policy meeting on Thursday, amid growing expectations for a rate cut to support the faltering economy.
In the U.S, markets will be closed on Wednesday for the Independence Day holiday, while the country is to release official data on nonfarm payrolls report on Friday, after disappointing results in June sparked concerns over the strength of the U.S. economic recovery.
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