Oil Rises a Third Day as China Says It Will Increase Investment

March 5 (Bloomberg) -- Crude oil rose for a third day in New York, extending yesterday’s surge, as China said it will “significantly increase” investment this year to boost its economy, potentially draining ample supplies of the fuel.

Oil climbed 9 percent yesterday after an official said Chinese Premier Wen Jiabao may announce new measures to spur expansion, adding to a 4 trillion yuan ($585 billion) spending plan. A U.S. government report yesterday showed an unexpected decline in crude-oil inventories last week as OPEC cut production.

“There are signs of optimism about the economy after weeks of very bleak news,” said Michael Lynch, president of Strategic Energy & Economic Research, in Winchester, Massachusetts. “We are also starting to see the OPEC production cuts impact inventories here.”

Crude oil for April delivery rose 22 cents, or 0.5 percent, to $45.60 a barrel at 11:26 a.m. Sydney time on the New York Mercantile Exchange. Yesterday, futures rose $3.73 to $45.38. Prices are up 1.7 percent so far this year.

Wen will announce “a new stimulus package” in his annual address to the nation’s legislature, former statistics bureau head Li Deshui said in Beijing yesterday. China will boost spending in 2009 to counter a slowdown in the world’s third-biggest economy, Wen said in the work report, delivered today. China is the second-biggest oil consumer after the U.S.

“China is key,” said Bill O’Grady, chief markets strategist at Confluence Investment Management in St. Louis. “They are talking about doing the right things to boost growth. An additional stimulus program will be good for commodities such as oil and copper.”

‘Bold’ Measures

Bank of Japan board member Miyako Suda said yesterday the central bank should signal that it’s prepared to take “bold” measures to counter the recession. Japan’s lower house of parliament approved a bill that will free up about 5 trillion yen ($50 billion) for economic stimulus.

“Commodities are looking like a good bet with all of the money being pumped into the economy,” said Michael Fitzpatrick, a vice president for energy at MF Global Ltd. in New York. “Commodity prices should slowly grind higher as investors buy real things as an inflation hedge.”

Commodities yesterday had their biggest increase since Dec. 31. The Reuters/Jefferies CRB Index of 19 raw materials rose 7.78, or 3.8 percent, to 211.45.

Cushing Stockpiles

Crude oil supplies fell 757,000 barrels to 350.6 million barrels in the week ended Feb. 27, the Energy Department said in a report yesterday. Inventories were forecast to rise 1 million barrels, according to the median of analyst estimates in a Bloomberg News survey.

Stockpiles at Cushing, Oklahoma, where New York-traded West Texas Intermediate crude is delivered, declined 553,000 barrels to 34 million barrels last week, the report showed. Inventories in the week ended Feb. 6 were the highest since at least April 2004, when the department began keeping records for the location.

The high inventories at Cushing have depressed the West Texas price so that Brent crude oil traded in London is at a premium to the U.S. grade.

Brent crude oil for April settlement increased $2.42, or 5.5 percent, to settle at $46.12 a barrel on London’s ICE Futures Europe exchange yesterday. Oil traded in New York’s discount to the Brent grade narrowed to 74 cents a barrel, the lowest since Jan. 2.

The price of oil on Nymex for delivery in May is $1.75 a barrel higher than for April, down from a $1.82 premium yesterday. Traders who purchase oil today can sell contracts for delivery in later months at a higher price, a condition known as contango.

Downside Risk

“We are starting to see the supplies at Cushing drop, and this is being reflected in the contango,” said Nauman Barakat, senior vice president of global energy futures at Macquarie Futures USA Inc. in New York. “The contango is narrowing substantially, which may be a sign that downside risk is over.”

The Organization of Petroleum Exporting Countries, due to meet again on March 15, cut output by 2.7 percent in February, a Bloomberg News survey showed. OPEC production averaged 27.78 million barrels a day last month, down 770,000 from January, according to the survey of oil companies, producers and analysts. Output in January was revised 20,000 barrels a day lower.

The survey showed the 11 OPEC members with output quotas, all except Iraq, produced 545,000 barrels a day above the target of 24.85 million barrels a day. The countries pumping the most over their quotas were Iran, Angola and Libya.

Refineries operated at 83.1 percent of capacity, up 1.8 percentage points from the prior week, the Energy Department report showed. Analysts were split over whether there was an increase or decline.

Gasoline inventories rose 168,000 barrels to 215.5 million barrels, the report showed. Analysts forecast that supplies would decline 800,000 barrels.