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Oil Jumps on Surprise Supply Drop

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zsvq1p   Wednesday, 03/05/08 11:52:46 AM
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Oil Jumps on Surprise Supply Drop

Oil Prices Surge Higher After the Government Reported a Surprise Drop in Supplies Wednesday March 5, 11:46 am ET
By John Wilen, AP Business Writer

NEW YORK (AP) -- Oil prices surged higher Wednesday after the government reported a surprise drop in crude oil stockpiles and OPEC held production levels steady
Most analysts had expected the Energy Department's Energy Information Administration to report oil supplies rose last week for the eighth straight time. Instead, they fell by 3.1 million barrels.

In Vienna, meanwhile, the Organization of Petroleum Exporting Countries said it would hold production levels steady, at least for now. Ministers said slowing economic conditions in the U.S. and falling demand for oil and gasoline shows the world is well-supplied with crude.

Gasoline demand is off about 1 percent over the last six weeks compared to the same period last year, according to EIA data. At the same time, gasoline supplies rose last week to a 15-year high, said Tim Evans, an analyst at Citigroup Inc., in New York.

"Clearly, refineries have enough crude oil to produce an abundance of gasoline," Evans said.

Still, investors chose to focus on the drop in crude supplies, sending light, sweet crude for April delivery up $3.95 a barrel to $103.47 on the New York Mercantile Exchange.

At the pump, meanwhile, gas prices rose a cent to a national average of $3.178 a gallon, according to AAA and the Oil Price Information Service. Gas prices have been following oil's recent rally, and are 69 cents higher than a year ago. Many analysts expect prices to rise to near $4 a gallon this spring and summer as driving demand picks up.

President Bush on Tuesday asked OPEC for a production increase, warning that high oil prices are helping push the economy toward recession. Several ministers, however, have recently suggested the cartel should cut production due to falling demand.

OPEC did pledge to keep a close eye on oil supply and demand, and said it could change its output levels quickly if needed.

Other aspects of the EIA's inventory report were roughly in line with expectations. Gasoline supplies grew by 1.7 million barrels last week, more than the 900,000 barrels analysts expected, and are at record levels. On the other hand, inventories of distillates, which include heating oil and diesel fuel, fell by 2.4 million barrels, more than the expected 1.9 million barrel decline, and are low in historic terms.

Refiners ramped up production for the second week in a row, boosting activity by 1.2 percent to 85.9 percent of capacity, beating analyst forecasts.

The weaker dollar also pushed oil prices higher Wednesday. Many analysts believe the dollar's decline against other world currencies is the primary reason behind oil's rise to inflation-adjusted records this week.

"There's an ongoing stampede to be a part of the crude oil rally," Evans said.

Crude futures offer a hedge against a falling dollar, and oil futures bought and sold in dollars are more attractive to foreign investors when the dollar is falling.

Many analysts believe oil's rally will be short-lived. Falling demand for overall petroleum products, which was down 3.4 percent over the last four weeks compared to the same time last year, suggest prices could drop steeply once the dollar-driven oil investment frenzy runs out of steam, analysts said.

"There are some very disturbing things in this report on the demand side," said Andrew Lebow, senior vice president at MF Global Inc. in New York.

Other energy futures also rose Wednesday. April gasoline rose 6.3 cents to $2.5921 a gallon on the Nymex, and April heating oil futures jumped 12.73 cents to $2.9191 a gallon. April natural gas rose 24.5 cents to $9.598 per 1,000 cubic feet.

In London, April Brent crude rose $3.31 to 100.83 on the ICE Futures exchange.

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