Oil hits three-month high on economy optimism

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Brent crude oil reached its highest level in three and a half months on Wednesday, passing $115 a barrel after better-than-forecast European and U.S. data spurred optimism for the global economy.

Brent crude oil futures were 64 cents higher at $115 a barrel by 1310 GMT after hitting $115.24, their highest since Oct. 16, 2012.

U.S. oil rose 40 cents to $97.97 after gaining nearly 1.2 percent in the previous session.

Euro zone economic sentiment improved more than expected across all sectors in January, rising for the third month in a row in a sign that the economy could be emerging from a low point in the fourth quarter of 2012.

The European Commission's economic sentiment index rose to 89.2 points in January from 87.8 points in December, against market expectations of an improvement to 88.2.

Brent crude is up 3.5 percent this month, its biggest gain since August, but lagging behind equities, with the U.S. S&P 500 up about 5.7 percent.

Filip Petersson, an SEB analyst in Stockholm, pointed to likely relative weakness for oil in coming months because of a relatively well-supplied oil market.

"Oil has followed risk assets higher, but we think it's strong versus the fundamentals, with production cuts needed from Saudi Arabia due to strong supply from OPEC," he said.

Investor sentiment received a boost on Tuesday after U.S. home price data showed prices in November rose more than 5 percent from a year ago - the biggest increase since August 2006, when the housing market was starting to collapse.

Investors were also awaiting U.S. fourth-quarter GDP data at 1330 GMT.

The focus, however, is now on the Federal Open Market Committee's (FOMC) two-day monetary policy meeting, which started on Tuesday. The Fed has said that it expects to keep short-term U.S. interest rates exceptionally low to support the economy.

The low rates have helped to push up oil prices, with investors pouring cash into riskier asset classes.

CHINA LIFT

"At the January FOMC meeting, we believe that the Fed is unlikely to make any major policy changes, but the Fed is likely to mention the modestly improving U.S. economy," Jason Schenker, president of Prestige Economics, said in a report.

The short-term oil outlook was also buoyed by optimism about growth acceleration in China.

January factory activity in China is expected to have expanded at its fastest pace in nine months, according to a Reuters poll ahead of official PMI data on Friday, adding to signs that recovery momentum is building as domestic demand strengthens.

The rebound in China's growth is expected to continue until the second quarter before fading in the second half, though an economic rebound elsewhere towards year-end is likely to sustain global growth rates for the year, said Jeremy Friesen, a commodities strategist at Societe Generale in Hong Kong.

Supply risks from the Middle East also supported oil prices after activists said that at least 65 people were found shot dead with their hands bound in the northern Syrian city of Aleppo on Tuesday in the near two-year revolt against President Bashar al-Assad.

U.S. crude stocks rose by 4.2 million barrels last week, the American Petroleum Institute (API) reported on Tuesday.

Crude stocks at Cushing fell by 15,000 barrels, according to the API, while gasoline stocks rose by 2.4 million barrels and distillate stocks fell by 1.8 million.

Analysts had expected U.S. crude stocks to rise by 2.6 million barrels, according to a Reuters survey ahead of weekly inventory reports from the API and the U.S. government's Energy Information Administration (EIA).

The EIA weekly inventory report is due on Wednesday at 1030 EST (1530 GMT).



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