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Oil ends at 3-week low as US supply nears 7-year high
2006-03-09 00:40 GMT


SAN FRANCISCO (AFX) - Oil futures closed at a three-week low Wednesday after a government report showed that supplies were at their highest level since 1999, and key oil producers passed up a chance to cut production quotas ahead of an expected slowdown in second-quarter demand.

"Crude oil, gasoline and distillate stocks remain above the five-year average," said James Williams, an economist at WTRG Economics. "We have all the crude we need."

And "if not for the 'fear' premium currently in the oil price, current supply-versus-demand statistics would be screaming for a 50 usd-or-below price," said Peter Grandich, editor of Grandich Publications, adding that prices will likely see 50 usd or below before the year ends.

The April crude contract fell to a low of 59.25 usd a barrel on the New York Mercantile Exchange, its weakest intraday level since Feb 15. The contract closed down 1.56 usd, or 2.5 pct, at 60.02 usd a barrel.

If prices fall below 59.20 usd, they'll touch their lowest level of the year. The contract closed 5.7 pct below Friday's close.

Among petroleum products, April unleaded gasoline gained 1.68 cents to close at 1.6502 usd a gallon, while April heating oil shed 2.81 cents to finish at 1.6941 usd a gallon.

Earlier Wednesday, the Energy Department said crude inventories jumped 6.8 mln barrels for the week ended March 3 to total 335.1 mln. That's 10 pct above the year-ago level.

The tally marked the highest supply level since the end of May 1999, the data showed.

The American Petroleum Institute's measure of crude supplies climbed 5.9 million barrels for last week to total 336 mln.

The Energy Department also reported that motor gasoline stocks fell by 1.1 mln barrels, with total stocks at 224.8 mln barrels -- 0.5 pct below the year-ago level.

They were down 1.4 mln barrels at 217 mln, the API said.

And distillate supplies, which include heating oil, fell 2.7 mln barrels to 131.4 mln, the government data showed. Even so, they're still 13.7 pct above the year-ago level. Supplies of the fuel dropped 5.1 mln barrels to 129 mln, the API said.

The decline in petroleum products comes on the heels of fall in refinery capacity utilization, which fell to 83 pct from 85.2 pct, according to Energy Department figures.

The low refinery-utilization numbers will "lend some support," said Williams.

But "there are three hurricane damaged refineries coming back on line in March and April, so this should not be of too much concern," he said.

Total products supplied over the last four-week period averaged over 20.7 mln barrels, per day, or 0.3 pct above the same period a year ago, the Energy Department said.

Motor gasoline demand average over 9 mln barrels per day over the last four-week period, up 2.5 pct from a year earlier, while distillate demand was up 2.1 pct, averaging 4.3 mln barrels per day for the period.

Also Wednesday, the Organization of the Petroleum Exporting Countries officially decided to leave its oil-output quota at 28 mln barrels per day "for the time being."

OPEC said it made its decision to stand pat on the quota, which excludes Iraqi production, "in order to contribute further to market stability and robust global economic growth, as well as maintain prices at levels reasonable to both producers and consumers."

At the same time, the oil producers agreed to closely "monitor market developments and to take appropriate and swift action, as and when the need arises," the statement said. OPEC will hold a special meeting in Venezuela on June 1.

Sheik Ahmed al Sabah, Kuwaiti's oil minister, said he think prices will fall below 60 usd a barrel by the end of June, but will likely rebound to the 60 usd range in the fourth quarter, the Associated Press reported.

Despite pressure from the hefty US stock levels and OPEC's decision to pass on an output cut, the oil market was poised to refocus the bulk of its attention on Iran.

Iran said it was capable of inflicting "harm and pain" and could change its oil policy, Reuters reported, after the US warned the country that it could expect consequences from the United Nations if it continued its nuclear research program.

After OPEC's decision Wednesday, however, Iranian Oil Minister Kazen Vaziri-Hamaneh gave assurances that if the UN placed sanctions on his country, Iran would not halt its oil exports, according to a report from AFP.

"If they don't resolve this and the UN threatens sanctions, then all they have to do is pull back on oil supplies and we have 100 usd oil," said Julian Phillips, an analyst at GoldForecaster.com.

Overall, "this market remains hostage to fears of supply interruptions from Iran over the nuclear issue and Nigeria because of recent insurgent attack on its infrastructure," said WTRG's Williams.

The US supply data are "consistent will oil prices in the 40 usd levels but there remains a supply interruption risk premium of at least 15 usd per barrel," he said.

"If peace broke out all over the world, or there was another 2-3 mln barrels of spare oil production capacity, oil prices would plummet," he said.

In other news, Ecuador declared a state of emergency late Tuesday after thousands of Petroecuador workers went on strike, according to Edward Meir, an analyst at Man Energy.

Elsewhere, natural-gas futures mirrored the weakness among its energy peers to trade as low as 6.44 usd per million British thermal units, the weakest level since late February of last year.

April natural gas finished the session down 3 cents at 6.648 usd per million British thermal units.

The Energy Department will provide an update on natural-gas stocks in storage Thursday morning, covering the week ended March 3.

Analysts at Fimat said market estimates for the data range from a decline of 80 bln to 140 bln cubic feet, but Fimat's looking for a fall closer to 123 bln. UBS analysts expect a fall of 110 bln to 120 bln. A year ago, supplies fell 134 bln, Fimat said.

"While a late-winter cold snap or cool spring could whittle down some of the storage surplus, it is probably too late to prevent stocks from ending the heating season at record-high levels," Fimat analyst Michael Fitzpatrick said in a note to clients.

In energy equities, benchmarks tracking the oil and gas sectors moved slightly higher, with the Amex Natural Gas Index chalking up the bigger gain.

Meanwhile, gold futures closed lower Wednesday to tally a four-session loss of over 26 usd an ounce.

Taking a broad measure of the commodity-futures markets, the Reuters/Jefferies CRB Index was down 1.1 pct at 317.87 points on the New York Board of Trade.

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