By Kishori Krishnan Exclusive To Heavy Oil Investing News

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The jump was all too clear. A surprise drop in U.S. oil inventories caused crude prices to jump 14 per cent on Thursday, in New York, powering a broad commodities rally that pushed copper and corn higher. The only noticeable drop was in gold, which closed lower for the first time in three days.

The Reuters-Jefferies CRB index which tracks commodity futures across 19 markets, rose more than 2 per cent – its first rebound in three sessions. U.S. crude futures for March delivery rose $4.86 to settle at $39.48 a barrel, marking the market’s biggest settlement gain since December 31.

The rally in oil contrasted with the grim global economic picture. The U.S. Labor Department said the number of American workers drawing unemployment aid jumped to a record high of nearly five million, highlighting the deterioration in the labor market.

Elsewhere in the world, oil prices fell in Asian trade in a market plagued by weak demand despite a sharp price rebound the day before, analysts said.  New York’s main futures contract, light sweet crude for delivery in March, fell 78 cents to US$38.70 a barrel. The contract was to expire at the close of trade later Friday. Brent North Sea crude for April delivery shed 43 cents to US$41.56. Analysts said Thursday’s price rebound did not indicate any increase in global energy demand, which has fallen heavily during the worldwide economic slowdown.

“We may in fact be seeing a draw down in prices… (The rebound) was more a supply-driven event, not a pickup in demand,” said Mark Pervan, senior commodities analyst for ANZ bank, Melbourne, said in a report to newswires. Pervan said prices rose because of cutbacks in output imposed by the Organisation of Petroleum Exporting Countries (OPEC) rather than increased energy demand.

On Thursday, the benchmark New York contract rose by almost five dollars and Brent jumped more than two dollars after US Energy Information Administration (EIA) data showed US crude reserves fell 200,000 barrels in the week ending February 13, after several weeks of significant increases.

Morgan Stanley analysts Hussein Allidina and Seth Kleinman also cautioned against reading the EIA data as the beginning of a rebound in demand. They said they were not counting on demand recovering in the near term, despite US President Barack Obama’s effort to stimulate the recession-plagued US economy.

Meanwhile, Japan and South Korea struggled to revive economies hit by collapsing exports, Russian unemployment soared and Britain’s budget deficit reached a record high. “Crude stocks made a surprise fall here as imports were down and refinery activity was up,” said Amanda Kurzendoerfer, analyst at Summit Energy. “We’ll have to see if the import decline is the start of a trend as OPEC is really doing a lot to carry out output cuts.” The Organization of the Petroleum Exporting Countries has agreed to cut about five per cent of world supply to lift crude prices, which have plummeted from a record high above $147 a barrel in July.

Meanwhile, in a related instance, Brazil said it has agreed to supply up to 100 million barrels of crude oil a  day to China in a deal that involves a loan of up to $10 billion. According to a report by AP, the agreement was announced Thursday after President Luiz Inacio Lula da Silva met with Chinese Vice President Xi Jinping.

A memorandum of understanding says Brazil’s state-run energy company Petrobras will supply the crude, which will be refined by two Chinese state-owned enterprises, China Petroleum & Chemical Corp. and the China National Petroleum Corp.

Crude favoured

Germany’s leading mutual funds group DWS is backing energy stocks on expectations of strong demand for crude when economic growth picks up, the global head of equities at DWS said. Klaus Kaldemorgen also favours alternative energy and infrastructure stocks, which should be among the winners from government economic stimulus programmes.

Deutsche Bank’s mutual funds arm manages 121.7 billion euros (US$153.9 billion) in assets, of which 45.6 billion euros in equities funds. “Oil could be an exciting theme for 2009 and that goes for oil stocks too,” Kaldemorgen told DWS’s annual news conference.

“The price of oil should rise again soon as demand has not fallen as strongly as feared,” he said, citing the recently widened spread between crude futures and spot prices BRT- as a sign of market faith in higher oil prices ahead. His take: “Energy companies shine with impeccable balance sheets and high dividends,” he said.

Analysts issue upgrades

Shares of oil companies lifted on Thursday as crude oil prices jumped on a report signaling an inventory decline. Bernstein Research said it sees opportunities for energy sector growth in 2009 and upgraded a number of energy stocks on Thursday, advising investors to buy into stocks with a higher beta, that is stocks with high volatility, as the year progresses. Considering grim energy sector market conditions, Ben Dell, an analyst with Bernstein, said “there is limited downside to the beta energy names” and that, now, is a good time to invest.

In a report to AP, Dell upgraded exploration and production companies Talisman Energy Inc. (TSX:TLM ) and Chesapeake Energy Corp. (NYSE: CHK ) to ‘Outperform’ from ‘Market Perform.’ Both companies have under performed during the recent commodity price volatility, Talisman due to its lower quality, higher cost operations and Chesapeake due to its elevated leverage and forced asset sales. However, Dell said he expects the likely rebound in gas prices midyear 2009 and the growing appetite for energy beta stocks to drive a reversal in these trends.

While Dell spoke glowingly about many energy stocks, he downgraded Exxon Mobil Corp. (XOM.N), the world’s largest publicly traded oil company, and Occidental Petroleum Corp. (NYSE:OXY ), as he views both stocks as overvalued compared to the market. “(Exxon Mobil’s) strong balance sheet and top notch credit rating have driven significant out performance but catalysts for investors to put additional money into the name appear low,” he said.

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