Oil extends gains on expected drop in reserves and weaker dollar

West Texas Intermediate erased earlier daily losses and rose for a third day amid expectations for a yet another drop in U.S. crude oil inventories following the all-time record high reserve declines during the previous two weeks. A weaker dollar also supported prices.

On the New York Mercantile Exchange, WTI crude for September delivery traded at $106.20 per barrel at 14:12 GMT, up 0.26% on the day. Prices ranged between days high and low of $106.76 and $105.49 per barrel respectively. Light, sweet crude erased earlier weekly losses after advancing more than 12.5% throughout the last 3 weeks.

Meanwhile on the ICE Futures U.S. Exchange, Brent oil for September delivery traded at $108.37 per barrel at 14:15 GMT, up 0.25% on the day. Prices held in range between daily high and low of $108.68 and $107.69 per barrel respectively. The European benchmark reduced prior weekly losses to around 0.6% after settling 1.26% higher last week.

Oil prices advanced as investors focused on Ben Bernankes testimony to Congress tomorrow. Analysts expect the Fed Chief to further dampen speculations over an earlier-than-expected deceleration of the central banks Quantitative Easing program, thus supporting commodities. The dollar index, which measures the greenbacks performance against six major peers, remained lower on the day ahead of Bernankes statement, despite the released positive U.S. economic data today. The U.S. currency was also pressured by the euro, which was boosted by Angela Merkel’s statement today.

According to the U.S. Labor Department, consumer prices rose by 0.5% in June, surpassing expectations for a 0.3% gain and May’s 0.1% reading. Year-on-year, CPI surged by 1.8%, outperforming May’s annualized 1.4% gain and expectations for a rise to 1.6%. Gasoline prices accounted for about two thirds of the increase in the indicator.

The government agency also reported that month-on-month Core CPI, which excludes the more volatile energy and food costs, met both expectations and May’s reading of a 0.2% increase. On an annual basis, core consumer prices also met projections of a 1.6% gain, but underperformed May’s 1.7% rise.

Redbook Retail Sales gained 0.8% in the week ending July 13, well above the preceding period’s 0.3% decline. A separate report showed Treasury International Capital rose to $56.4 billion in May, up from April’s upwards revised reading of $28.3 billion.

Meanwhile, U.S. Industrial Production also reinforced sentiment for a recovering economy, meeting expectations for a 0.3% surge in June, up from May’s unchanged reading compared to April. Capacity Utilization for June outperformed both projections and May’s upwards revised reading of 77.7%, rising to 77.8%, which indicated a recovering manufacturing sector.

Stockpiles expected to fall

Oil also drew strong support as this weeks API and EIA oil reserves reports are expected to show another drop in inventories, indicating a steady rise of demand in the worlds top consumer. According to a Bloomberg survey ahead of EIA’s report, crude reserves should have fallen by 1.88 million barrels last week, the lowest level since 5 months. Gasoline inventories probably dropped by 1.7 million barrels, while distillate fuel inventories are expected to have risen by 1.5 million barrels. U.S. Crude Oil Inventories dropped by 20.2 million barrels to 373.9 million in the 14 days ending July 5, the biggest drop since more than 30 years.

Phil Flynn, senior market analyst at the Price Futures Group in Chicago, said for Bloomberg: “The market is pricing in the possibility of another drawdown in supplies. It’s giving oil some momentum. The market is up with the dollar being down.”

Apart from Bernankes testimony and crude reserves, market players will also be keeping an eye on the remaining U.S. data for the week to gauge the U.S. economys recovery pace. On Wednesday, Building Permits and Housing starts will provide data about the U.S. construction sector. The Labor Department will release Initial Jobless Claims on Thursday. The number of people who have filed for unemployment payments is expected to have dropped by 20 000 to 340 000 after last week an unexpected surge to 360 000 supported Bernanke’s statement that the U.S. labor market is still fragile.