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Oil Rises on Concern Recovering Fuel Demand to Strain Supplies

Oil Rises on Concern Recovering Fuel Demand to Strain Supplies

Oct. 11 (Bloomberg) -- Crude oil had the biggest gain this month after the International Energy Agency said demand will rebound and refineries must operate at their limits to avoid fuel shortages during the year-end peak in demand.

The IEA, adviser to 26 industrialized nations on energy, cut its fourth-quarter estimate for non-OPEC oil supply by 900,000 barrels a day. Production outside the Organization of Petroleum Exporting Countries will rise at the slowest pace in six years, the agency said today in a monthly report. Declining gasoline use is temporarily compensating for reduced output.

``Demand is going to pick up again,'' said Francisco Blanch, a senior oil strategist with Merrill Lynch & Co. in London. ``The market was already in a very tight situation before coming into the hurricane season. U.S. consumers can still afford the gasoline.''

Crude oil for November delivery rose as much as 95 cents, or 1.5 percent, to $62.75 a barrel on the New York Mercantile Exchange, where it was up 83 cents at 1:24 p.m. London time. Oil has doubled in the past two years, though it has retreated 12 percent from a record $70.85 a barrel on Aug. 30.

About 13 percent of U.S. refining capacity remains idle following hurricanes Katrina and Rita, forcing operating plants to focus on gasoline production. Refiners normally make more heating oil at this time of year to meet the annual fourth-quarter peak in demand as the Northern Hemisphere winter approaches. More than three-quarters of U.S. oil output in the Gulf of Mexico remains shut after the hurricanes destroyed 65 platforms.

OPEC Demand

U.S. storm disruptions will have caused the loss of 140 million barrels of crude oil and 163 million barrels of oil products by the end of this year, the IEA estimated.

Global oil consumption will average 83.4 million barrels a day this year, 100,000 barrels a day less than forecast a month ago, the Paris-based IEA said. Next year, demand will expand by 2.1 percent, rebounding from a 1.5 percent gain this year.

``The IEA report was fairly bullish,'' Rob Laughlin, a senior broker at Man Financial, a unit of the world's largest hedge-fund company, said in London. ``Demand growth is only going to slow in the fourth quarter and it's bound to rebound next year.''

Brent crude for November settlement rose 71 cents, or 1.2 percent, to $59.49 a barrel on London's International Petroleum Exchange.

The average gasoline price at the pump in the U.S., the world's largest consumer, declined 1.40 cents yesterday to $2.871 a gallon from $2.885 a day earlier, the AAA motorist organization said on its Web site. The average surged to a record $3.057 on Sept. 2, the week that Katrina struck and caused scattered fuel shortages.

Temporary `Reductions'

The IEA ``has made only very minor downward revisions to the pre-hurricane demand projections,'' said Kevin Norrish, an analyst at Barclays Capital in London. ``Even these modest reductions are expected to prove only temporary.'' The demand cuts ``are dwarfed by the substantial cuts'' in U.S. oil output.

The fourth-quarter demand for oil from OPEC, the so-called ``call on OPEC,'' was raised by 800,000 barrels a day from the previous IEA report to 29.9 million barrels a day to compensate for the loss of production in North America after the storms.

``A very large amount of U.S. Gulf of Mexico production has been shut for the past month and a half,'' Blanch said. ``That puts a lot of pressure on non-OPEC production. It's going to be a very bad year'' for supplies from outside the group.

IEA members including the U.S., Japan and Germany released emergency oil and fuel stockpiles last month for only the second time in 30 years because of Katrina. A drop in U.S. oil demand since the storms reduces the need for more emergency releases, said Claude Mandil, the agency's executive director.

Refining `Bottleneck'

The forecast for global demand in the fourth quarter was cut by 100,000 barrels a day from a month ago, to 85.46 million barrels a day.

``The bottleneck is in the refining sector,'' Blanch said. ``Prices have to stay high to slow the rate of demand growth.''

The November crude contract on Nymex halted a five-session drop on Oct. 7 after prices failed to close below $60.85, identified by a trading tool called a Fibonacci graph as a price that would trigger selling.

Some technical traders measure a market's gains or losses relative to a series of numbers known as the Fibonacci sequence. The price was the midpoint of the advance from May 23 to the high on Aug. 29. Key levels in this analysis are 23.6 percent, 38.2 percent, 50 percent, 61.8 percent and 76.4 percent.

To contact the reporters on this story:
Alejandro Barbajosa in London at [e-mail];
Stephen Voss in London at [e-mail]


LINK: http://www.bloomberg.com/apps/news?pid=10000103&sid=aLbGA0BgImsc&refer=us