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Crude Heads Lower

Kristina Shevory

Crude futures were sinking below $72 Wednesday as the West debated Iran's response to an incentive package designed to halt its nuclear program. An unexpected increase in gasoline supplies was also pressuring prices.

Iran met its self-imposed deadline yesterday to respond to Western economic incentives, but refused to say whether it would halt uranium enrichment, the key point of the incentives package. Iran's apparent refusal to give a straight reply appeared to some Western diplomats as a ruse to buy time until the U.N.'s Aug. 31 deadline passes.

No details of Iran's 21-page response have been released.

Germany, France, Great Britain and the U.S. will meet today to discuss Iran's response, though France's foreign minister said Iran must stop nuclear activities before talks begin. John Bolton, the U.S. ambassador to the U.N., has said he will push for sanctions if Iran refuses to cut uranium enrichment.

In the coming days, Iranian officials are expected to announce a "very important achievement" in nuclear development, the country's Mehr news agency said Wednesday. There were no further details, Reuters reported. If Iran says it is pushing ahead with uranium enrichment, the move may strengthen the U.N.'s case for sanctions.

After a two-year hiatus, Iran kick-started its nuclear program, saying it seeks to produce more electricity for its growing population. The West, though, suspects Tehran wants to develop nuclear weapons.

October crude was recently slipping $1.40 to $71.70 a barrel on Nymex. Heating oil was shedding 4 cents to $1.99 a gallon, and gasoline was dipping 8 cents to $1.85 a gallon.

"This week's inventories report offers unequivocal evidence that oil prices need to moderate. Inventories are still fairly high, refinery utilization is picking up and demand is clearly moderating," said Rakesh Shankar, an energy analyst at Moody's Economy.com.

Crude inventories dropped by 600,000 barrels to 330.4 million barrels as refiners ramped up gasoline production and imports dropped. Still, supplies remain nearly 5% above last year, according to the weekly petroleum update from the U.S. Energy Department released this morning.

Supplies of gasoline increased by 400,000 barrels to 205.8 million barrels, and are now about 3% above the same period last year. Analysts in a Bloomberg poll had expected a drop of 2 million barrels after millions of Americans took to the roads for their summer vacations. Consumption typically peaks during the summer.

Despite high gasoline prices at the pump, demand over the last four weeks is up 1.7% over last year. The average price of regular gasoline is $2.92 per gallon, up 31 cents from the same period in 2005. Refining capacity increased to 92.8% last week from 91.5% the previous week.

Low demand and high production boosted inventories of distillates by 2.3 million barrels last week. Distillates include petroleum products like jet fuel and heating oil.

Natural gas was eking out a 14-cent decrease to $6.86 per million British thermal units on expectations of another boost in domestic supplies. The U.S. Energy Department will release it weekly inventory update on Thursday, and estimates are for a 53 billion cubic foot rise. There is currently 12% more natural gas in storage than at this time last year.

Futures of the fuel, which is used to generate electricity, were rising earlier on storm activity and hot weather in the southwestern portion of U.S. A tropical depression in the central Atlantic strengthened Tuesday into Tropical Storm Debby and was moving west-northwest. Forecasters say it is still too early to say whether the storm will threaten the Gulf Coast, where much of the country's refiners and petroleum production is located.

There have been four named storms thus far the season, vs. 10 last year. However, the peak hurricane season started only one week ago and lasts through October, more than enough time for hurricanes to develop and lash the Gulf Coast. The National Hurricane Center predicts there will be 12 to 14 named storms this year, compared to 28 in 2005.

Energy stocks were weakening as the day progressed, in line with commodity price action. The Philadelphia Stock Exchange Oil Service Index was recently down 2.4%, while the Amex Oil & Gas Index was down 1.4%. Sunoco (SUN Quote), Valero Energy (VLO Quote) and Hess (HES Quote) were leading decliners among drillers and refiners.

Among oil service firms, Tidewater (TDW Quote), National Oilwell Varco (NOV Quote) and Baker Hughes (BHI Quote) were among the notable laggards, each dipping about 3%.