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Oil Drops on Signs U.S. Supplies Enough to Counter Hurricanes

Oil Drops on Signs U.S. Supplies Enough to Counter Hurricanes

July 18 (Bloomberg) -- Crude oil declined for a third day in four on speculation that higher-than-average U.S. inventories are sufficient to compensate for disruptions to output from hurricanes.

U.S. crude stockpiles were 7 percent higher than their five- year seasonal average in the week ended July 8, the Energy Department said. Hurricane Emily yesterday forced Petroleos Mexicanos, known as Pemex, to suspend production in the Campeche Sound, which pumped 83 percent, or 2.8 million barrels a day, of Mexico's output in the five months through May.

``The market has a long way to come down because stock figures are looking better and better,'' said Robert Montefusco, a broker at Sucden (U.K.) Ltd. in London. ``Hurricanes are going to keep the market wary, but lots of investment funds are starting to unwind their positions'' by selling.

Crude for August delivery fell as much as 50 cents, or 0.9 percent, to $57.59 a barrel on the New York Mercantile Exchange, where it was down 37 cents at 2:07 p.m. in London. Oil earlier rose as much as 1.5 percent and is up 39 percent in the past year. It reached a record $62.10 on July 7, partly on concern about hurricane-related disruptions to output in the Gulf of Mexico.

U.S. stockpiles of distillates, a group of fuels that includes heating oil and diesel, rose for an eighth straight week, last week's Energy Department report showed, easing concern about strains on refiners in the fourth quarter, when demand is expected to peak.

``The inventory build means that the risk of prices isn't totally to the upside anymore'' and prices could fall, said Michael Lewis, an oil analyst from Deutsche Bank AG in London.

Growth Slowing

The Organization of Petroleum Exporting Countries, the producer of about 40 percent of the world's oil, said global oil demand will grow more slowly next year as high prices deter consumption. Demand in 2006 will rise by 1.9 percent, or 1.5 million barrels a day, to 85.2 million barrels a day. That compares with annual growth of 1.98 percent this year, OPEC said in a monthly report today, its first estimate for 2006.

Most crude producers, such as OPEC, are pumping near capacity to let stockpiles rise before demand peaks. Oil stockpiles in Organization for Economic Cooperation and Development nations rose to the equivalent of 54 days of demand in May, up from 53 days in April, and 2.5 days more than year-earlier levels, the International Energy Agency said last week.

Emily today is expected to become the fifth storm since the hurricane season began on June 1 to enter the Gulf of Mexico, a basin that produces almost 5 million barrels a day, or 6 percent of the world's output, when combining U.S. and Mexican fields.

Crossing Yucatan

The hurricane, downgraded to Category 2 from Category 4, has sustained winds near 100 miles per hour and is crossing Mexico's Yucatan Peninsula from the Caribbean to the Gulf, the National Hurricane Center in Miami said on its Web site. It is expected to strengthen once it enters the Gulf and may reach Mexico's northeastern coast, south of Brownsville, Texas, in two days, the Hurricane Center said.

``It's not a viable option to replace lost production from Mexico from anywhere else,'' said Kevin Norrish, an oil analyst at Barclays Capital in London. ``It's stuff you can ship into the U.S. quite quickly. If the shutdown lasts for three days, it would be pretty serious and there may be damage done'' to platforms.

Mexico exported almost 1.7 million barrels a day to the U.S. in May, according to Pemex, the state-owned oil monopoly.

The Campeche Sound is in the southernmost part of the Gulf, to the north of Campeche and Tabasco states. The hurricane's forecast path is about 150 miles north of the oil fields.

Lost Production

The cumulative loss of production from Hurricane Dennis, which swept close to U.S. rigs in the Gulf earlier this month, was 5.3 million barrels, less than the amount produced in two days in the region of Mexico where output was shut down yesterday.

The production lost from Hurricane Ivan in September was 43.8 million barrels, according to a report from the U.S. Minerals Management Service in June.

Royal Dutch/Shell Group today said it restarted its Pernis refinery and chemical plant in Rotterdam after a power cut forced the company to curb production there for four days. The ``controlled start-up'' began yesterday, according to Susan Shannon, a company spokeswoman, in London.

Brent crude for September settlement slid 46 cents, or 0.8 percent, to $57.15 on London's International Petroleum Exchange, after earlier rising as much as 1.6 percent.

Heavy Crude

About 2.5 million barrels of Mexico's daily total output of about 3.4 million is so-called heavy crude, according to Pemex. Heavy oil, which often has a higher sulfur content, is typically more difficult to refine into gasoline or diesel.

Prices for heavy crude may become more expensive relative to West Texas Intermediate, the New York benchmark, which is lower in sulfur content, said analysts including Norrish at Barclays and Lewis from Deutsche Bank.

``We would need to have an increasing number of disruptions like this one'' for output to be affected as much as it was by Hurricane Ivan, Lewis said.

New York oil prices soared more than 20 percent in the month after Hurricane Ivan passed through the Gulf in September, pulling offshore vessels from their moorings, damaging pipelines and sinking platforms.

The Energy Department will next report on U.S. inventories on July 20 at 10:30 a.m. Washington time.

To contact the reporter on this story:
Alejandro Barbajosa in London at [e-mail]


LINK: http://www.bloomberg.com/apps/news?pid=10000086&sid=aNPxx1.HWZKA&refer=latin_america