Another Gusher for Oil Prices

A surprising decline in U.S. crude inventories sent gasoline prices above the $112 mark while a production glitch also bumped natural gas higher

By BusinessWeek, Standard & Poor's, and Action Economics staff

Where is the upper limit for crude oil prices? Market seers who said oil would be hard-pressed to top $100 per barrel—and then $110—have been proven wrong on a regular basis. Soon they may have to start talking about the $120 mark: On Apr. 9, crude futures for May delivery rallied $3.21 to reach a new record high of $112.21 in New York trading. The price pulled back a bit to $111.39 in afternoon trading.

The spark for the latest rally was a surprising draw-down in crude-oil inventories, when the market had expected stockpiles to rise. According to the a weekly report from the Energy Information Administration (EIA), a unit of the U.S. Energy Dept., crude stockpiles fell by 3.2 million barrels from the previous week. Wall Street had expected an increase in stockpiles of 2.0 million barrels.

Adding to the misery, gasoline inventories fell by 3.4 million barrels on the week vs. expectations for a 2.5 million barrel decline. The news also pushed gasoline to record highs of over $2.82 per gallon.

Rounding out the gloomy supply picture, distillate (heating oil and jet fuel) stocks were down 3.7 million barrels vs. expectations for a 1.5 million barrel fall. Crude imports fell 1.37 million barrels per day (bpd), while product imports were up 46,000 bpd. Total product demand was down 0.4% vs. the same period last year, while refinery usage rose 0.6%, to 83.0%.

Supply Worries Drive Prices Higher

On Apr. 8 the EIA said the high price of oil and the weak economy are expected to curb summer demand. It predicted average monthly gas prices would peak around $3.60 per gallon in June, but noted the possibility that prices could cross $4.

Meanwhile supply worries in the oil patch helped drive prices higher in another vital corner of the energy complex. Natural gas futures rose 35¢ to $10.05 per million cu. ft. equivalent ahead of a report on gas inventories due Apr. 10. Investors appear to be drawing conclusions about what the gas report will say based on the Apr. 8 EIA report.

Before the EIA oil data, natural gas was approaching the $10 level. The pre-oil-inventory data rise was due to reports that Enterprise Partners, a key gas supplier, shut its 1 billion cu. ft.-per-day Independence Hub offshore production platform to address a possible leak, according to Citigroup's (C) Tim Evans.

"There's no estimate on how long repairs might take, and that's part of the chaos of the market at the moment, with at least some segment of the market fearing the worst," says Evans. "We'd suspect that some segment of the normal output might be restored within days, but really don't know."

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