Oil rises near $108 as investors eye supply drop

September 24, 2008 8:20:34 AM PDT
Oil prices rose near $108 a barrel Wednesday as traders shifted focus from U.S. economic woes to tightening global crude supplies amid a drop in output from the Gulf of Mexico and overseas. Light, sweet crude for November delivery rose $1.32 to $107.93 a barrel in morning trading on the New York Mercantile Exchange after earlier rising to $109.50. On Tuesday, the contract fell $2.76 to settle at $106.61.

Crude prices have risen $17 in the past week as investors funnel money back into commodities on worries that a proposed $700 billion bailout of financial firms will undercut the dollar and boost inflation.

In recent days, however, steadily shrinking world crude supplies have grabbed the market's attention. About 66 percent of oil production and 61 percent of natural gas output in the Gulf of Mexico remains shut-in after the passage of Hurricanes Gustav and Ike, according to the U.S. Minerals Management Service. The Gulf area is home to a quarter of U.S. oil production and 40 percent of refining capacity.

OPEC's decision earlier this month to cut production by 520,000 barrels a day and militant threats to Nigerian oil supplies have added to the supply crunch.

"We've been focused on what the government bailout is going to mean for energy demand, and now the market is starting to come to grips with how bad the supply situation is going to be," said Phil Flynn, analyst at Alaron Trading Corp. in Chicago. "We really can't afford to lose any more barrels."

Highlighting the supply tightness, the U.S. Energy Department's Energy Information Administration said U.S. crude stocks fell unexpectedly last week. The EIA said in its weekly inventory report that crude inventories fell by 1.5 million barrels, 0.5 percent, to 290.2 million barrels for the week ending Sept. 19. Analysts surveyed by energy information provider Platts had expected oil stocks to rise by 1.6 million barrels.

Meanwhile, gasoline inventories dropped by 5.9 million barrels, or 3.2 percent, to 178.7 million barrels. Analysts expected stockpiles of the motor fuel to fall by 5.1 million barrels. At the same time, U.S. refineries ran at 66.7 percent of total capacity on average, a loss of 10.7 percentage points from the prior week.

Analysts expected capacity to slip 3.5 percent to 73.9 percent.

Inventories of distillate fuel, which include diesel and heating oil, slid by 4.2 million barrels to 125.4 million barrels for the week ended Sept. 19. Analysts expected distillate stocks to decrease by 1.8 million barrels.

Federal Reserve Chairman Ben Bernanke and Treasury Secretary Henry Paulson were on Capitol Hill Wednesday for a second day of testimony about the bailout plan. On Tuesday, Paulson and Bernanke told legislators that without the move, neither businesses nor consumers would be able to borrow money, and the world's largest economy would grind to a virtual halt.

The economic slowdown has forced American consumers and businesses to cut back on energy use, sending oil prices falling from a record $147.27 a barrel reached July 11.

Congressional leaders predicted the emergency rescue would pass, but with significant changes. Democrats and Republicans alike demanded that the bailout limit pay packages for executives of companies helped by the rescue.

Oil investors have also been weighing what impact the bailout plan will have on the value of the dollar. Investors often buy crude futures as a hedge against a weakening dollar and inflation.

The 15-nation euro bought $1.4680 in morning trading on Wednesday, up from $1.4721 in New York late Tuesday.

"There's been a close correlation between oil and the dollar in the last week or so. Oil is tracking that pretty closely," said Mark Pervan, senior commodity strategist with ANZ Bank in Melbourne. "And there's a real question mark over the direction of the dollar."

In other Nymex trading, heating oil futures rose 5.02 cents to $3.0634 a gallon, while gasoline prices rose 4.20 cent to $2.637 a gallon. Natural gas for October delivery fell 17.4 cents to $7.97 per 1,000 cubic feet.

In London, November Brent crude rose $1.31 to $104.39 a barrel on the ICE Futures exchange.