Oil climbed for a third day in New York on signs an agreement will be reached on the U.S. budget, avoiding automatic spending cuts and tax increases next year.

Futures rose 0.8 percent after President Barack Obama made a new offer on revenue and House Speaker John Boehner ended his opposition to boosting tax rates for some top earners, increasing optimism that the changes, the so-called fiscal cliff, won’t happen. A report tomorrow will show that oil stockpiles dropped, according to a Bloomberg survey.

“The market is up on expectations that there will soon be a resolution to the budget impasse and we’ll avoid the fiscal cliff,” said Michael Lynch, president of Strategic Energy & Economic Research in Winchester, Massachusetts. “If that occurs, the economy should soar and demand will increase.”

Crude oil for January delivery advanced 73 cents to $87.93 a barrel on the New York Mercantile Exchange, the highest settlement since Dec. 4. The January contract expires tomorrow. The more-actively traded February future rose 73 cents to settle at $88.40.

Prices were little changed after the American Petroleum Institute reported U.S. oil supplies fell 4.1 million barrels to 371.7 million last week. The January contract traded at $88.97 a barrel at 4:33 p.m. the same as before the report’s release.

Brent oil for February settlement rose $1.20, or 1.1 percent, to end the session at $108.84 a barrel on the London- based ICE Futures Europe exchange. The front-month European benchmark ended the day at a $20.44 premium to the corresponding West Texas Intermediate contract traded in New York. The spread was $19.97 yesterday, the narrowest since Oct. 19.

Budget Offer

The president’s budget offer would raise taxes by $1.2 trillion and boost rates for households earning more than $400,000 a year, said a person familiar with the talks, who spoke on condition of anonymity. It would reduce federal spending by $1.22 trillion.

“The potential avoidance of the fiscal cliff is giving the market strength,” said Addison Armstrong, director of market research at Tradition Energy in Stamford, Connecticut.

Boehner said today in Washington that he will push a budget “Plan B” measure that would include tax increases on income of more than $1 million, while continuing to negotiate with Obama. He said he still hopes to reach a broader budget deal with the president. The speaker said he expects the legislation to be on the House floor by the end of the week.

“We’re moving on positive feelings that a way will be found to avoid the fiscal cliff,” said John Kilduff, a partner at Again Capital LLC, a New York-based hedge fund that focuses on energy. “The overtures from both the speaker of the House and president are being fully embraced by the markets. A deal would give us some needed stability.”

Budget Talks

Obama and Boehner are negotiating to avert more than $600 billion in tax increases and spending cuts set to start in January that threaten to derail the economic recovery. The U.S. accounted for 21 percent of the world’s oil demand last year, according to BP Plc (BP/)’s Statistical Review of World Energy.

Oil also rose with equities, as the Standard & Poor’s 500 Index (SPX) climbed 1.2 percent and the Dow Jones Industrial Average gained 0.9 percent. The dollar slipped as much as 0.6 percent against the euro. A weaker U.S. currency increases the appeal of dollar-denominated raw materials as an investment.

“It looks like there’s movement toward an agreement,” said Kyle Cooper, director of commodities research at IAF Advisors in Houston. “This positive momentum has boosted the stock market and a few days and oil is following stocks.”

Supply Glut

WTI has declined 11 percent in 2012 as the U.S. shale boom deepened the glut at Cushing, Oklahoma, the country’s largest storage hub and the delivery point for New York futures. That has left it at an average discount of $17.36 a barrel to Brent this year, compared with a premium of about 7 cents in the five years through 2010. Brent, the benchmark grade for more than half the world’s crude, has risen 1.3 percent this year.

The Brent-WTI spread narrowed yesterday in anticipation of the expansion of the Seaway oil pipeline next month. Enterprise Product Partners LP will boost flows on Seaway, which runs from Cushing to Freeport, Texas, to about 400,000 barrels a day in early January from 135,000, filing with the Federal Energy Regulatory Commission showed. That may cut a Midwest crude glut.

The Energy Department will probably report that U.S. crude inventories declined 1.75 million barrels in the week ended Dec. 14, according to the median of 11 analyst estimates in the Bloomberg survey. Stockpiles of gasoline and distillate fuel, a category that includes diesel and heating oil, climbed last week, the survey showed.

Electronic trading volume on the Nymex was 366,791 contracts as of 4:31 p.m. Volume totaled 489,772 contracts yesterday, 5.1 percent lower than the three-month average. Open interest was 1.51 million, the lowest level since Nov. 23.

Sourced from Bloomberg.com December 18th, 2012