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Associated Press
Oil Prices Rise on Report of Supply Decline
Thursday October 14, 3:59 pm ET
By Brad Foss, AP Business Writer
Oil Prices Rise After Government Reports Sharp Decline in Domestic Distillate Fuel Supply


A decline in the nation's inventory of heating oil catapulted crude futures prices toward $55 a barrel on Thursday, providing the latest jolt to a market already rattled by the world's tight supply of oil, strong demand and the possibility of output problems in several producing nations.
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Commercially available supplies of heating oil declined by 1.2 million barrels for the week ending Oct. 8, falling to 50.0 million barrels, or 10 percent below year ago levels, the Energy Department said in its weekly petroleum supply report.

"We're not in dire straits as far as supply goes, but we are certainly on the lower side of where we'd want to be" ahead of winter, said Tom Bentz, a trader at BNP Paribas Futures in New York.

Light crude for November delivery rose $1.12 to settle at $54.76 on the New York Mercantile Exchange, a record closing price. Trading was led by a 5-cent rise in November heating oil futures to $1.549 per gallon, a new record. Heating oil futures are now 77 percent above last year's level.

In London, Brent crude soared 79 cents to $50.84 per barrel on the International Petroleum Exchange.

While oil prices are more than 70 percent higher than a year ago, they are still around $25 below the peak inflation-adjusted price reached in 1981.

While some refiners are temporarily shut down to perform maintenance, Bentz said he does anticipate heating oil supplies to build dramatically between now and the start of winter. Another concern is that Europe's storage levels are low, meaning the United States could have a harder time attracting imports this year.

"Also, all the other issues relative to crude are still out there," Bentz said.

The underlying problem in oil markets today, according to many analysts, is that the world's excess production capacity -- the amount of surplus supply immediately available -- is about 1 percent of daily demand, now estimated to be above 82 million barrels.

Today's high price of oil reflects mounting concern that this slender supply cushion would be inadequate in the event of a large and prolonged loss of daily production. That is why pipeline sabotage in Iraq, political tensions in Venezuela and the travails of Russian oil giant Yukos have captured traders' attention in recent months.

Crude futures have climbed about $10 the last month alone, in large part because of the slow recovery of oil production in the Gulf of Mexico following Hurricane Ivan. Daily oil production in the region remains 28 percent, or 471,000 barrels, below normal. Since Sept. 11, nearly 20 million barrels of oil output has been lost, the equivalent of 3.3 percent of normal annual production.

The Energy Department reported that oil supplies grew by 4.2 million barrels to 278.2 million barrels. That was a bigger rise than was expected, but still leaves the nation's oil supply 3.5 percent below last year's level.

A pipeline explosion in Mexico stoked market fears on Wednesday, while labor unrest in Nigeria has kept traders on edge all week.

It was not immediately clear what the extent of damage was to Mexican production. The four-day "warning" strike that shut down cities across Nigeria was scheduled to end at midnight Thursday, but union leaders vowed the work stoppage will resume later this month if the government fails to reduce fuel prices. The strike did not affect the country's daily production of 2.5 million barrels.

ANZ Bank energy analyst Daniel Hynes in Melbourne, Australia, said the oil market "seems to be really playing on expectations of a shortage," even though none currently exists.

Similarly, OPEC president Purnomo Yusgiantoro said it was demand, not a supply shortfall, that has caused prices to soar this year. The Paris-based International Energy Agency predicts world consumption, fueled by particularly strong growth in China, will increase by another 2 million barrels daily in 2005.

Pledges by the Organization of Petroleum Exporting Countries to pump more oil have not cooled red-hot markets, traders say, because the type of crude being made available has a high sulfur content, making it less desirable for some refiners.

In other Nymex trading, November gasoline futures edged 1.13 cent higher to $1.4196 per gallon, while November natural gas futures declined by 4.8 cents to $6.803 per 1,000 cubic feet.

Associated Press Writers Jane Wardell in London and Yeoh En-Lai in Singapore contributed to this report.





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