Energy

Return to Article

Oil Prices Jump on Rumor of Saudi Cuts

The Associated Press

Columbus, Ohio -- Oil prices rose in volatile trading Wednesday after rumors spread that Saudi Arabia told major customers of significant production cuts.

Prices quickly had given up strong early gains after the government reported U.S. gasoline inventories were well above expectations, suggesting that American motorists continue to drive less.

Around midday, however, prices spiked close to 10%, the same time the Saudi rumor began to float, said Phil Flynn, an analyst with Alaron Trading Corp.

Light sweet crude for January delivery rose 3.4%, or $1.45, to settle at $43.52 on the New York Mercantile Exchange.

Investors tend to exit the market as the year closes out, creating very volatile trading. That appeared to be the case on Wednesday as well, with huge price swings.

A number of traders dismissed the Saudi rumor. Oil trader and analyst Stephen Schork credited the gains to an oversold market.

After hitting $40.50 a barrel last week, some oil traders believe that if the market has not bottomed out, it is close to doing so.

Still, there were signs that the American consumer continues to pull back on gas purchases.

Oil traders focused on gasoline inventories and also on refineries, which are rebounding from a violent hurricane season.

Gasoline inventories jumped by 3.8 million barrels. Analysts expected stockpiles of the motor fuel to rise by only 1.4 million barrels.

At the same time, U.S. refineries ran at 87.4% of total capacity on average, an increase of 3.1%.

Demand for gasoline over the four weeks ended Friday was 3.2% lower than a year earlier, averaging 8.9 million barrels a day.

"By and large this report shows we've got a lot more product out there than most people thought we did," said Jim Ritterbusch, president of Ritterbusch and Associates. "This is just one more indication of a weak demand environment."

Prices at the pump continued to slide, falling 1.5 cents overnight to a national average of $1.683 per gallon, according to auto club AAA, the Oil Price Information Service and Wright Express. That's 55.7 cents a gallon below what it was a month ago and $1.312 below where it was a year ago.

All eyes are now turning to Algeria, where OPEC meets next week.

The Organization of Petroleum Exporting Countries, which accounts for about 40% of global crude supply, has signaled that it plans to reduce output quotas.

A growing number of analysts now expect production cuts of as much as 2 million barrels a day, which would match the combined reductions of two previous output cuts earlier this year.

OPEC's November production was well above quotas agreed to by members earlier this year that were intended to take 2 million barrels of oil off the market each day, according to Platts. OPEC's 13 members pumped an average of 31.38 million barrels a day last month, a decline of only 880,000 barrels from the October level.

Russian Energy Minister Sergey Shmatko said Wednesday that Russia wants to try to coordinate with other non-OPEC producers and will soon make an announcement of its intentions with OPEC.

That has been met with some skepticism by analysts, and production cuts have failed to halt crude's slide to date.

"I view OPEC as almost powerless right now," Ritterbusch said.

Demand for energy has evaporated amid a recession that only appears to be spreading and by most indications, OPEC's ability to bolster prices has been greatly diminished.

China said Wednesday that exports in November fell 2.2% from a year ago, the first decline in seven years as consumer demand around the world has plunged. That was down sharply from October's export growth of 19.1% and well below analysts' forecasts of a 13% to 15% rise. Imports fell by 17.9%, pushing China's trade surplus to a new high of $40.1 billion.

In the U.S., wholesalers cut back on their inventories in October by the largest amount since the period following the 2001 terrorist attacks while they watched their sales plunge by a record amount. Analysts predict more grim news in the months ahead as the current recession deepens.

The Commerce Department reported Wednesday that wholesalers, the companies in the supply chain between manufacturers and retailers, reduced their inventories by 1.1% in October.

The World Bank on Wednesday cut its real gross domestic product growth outlook in East Asia to 5.3% in 2009 from an expected 7.0% this year.

Vikram Nehru, the World Bank's chief economist for East Asia and the Pacific, warned that with conditions changing so quickly, the outlook for the region could easily worsen.

"We are frankly in unknown territory at this stage," Nehru said.

Oil prices have fallen 70% since peaking at $147.27 in July.

In other Nymex trading, gasoline futures rose 3.2 cents to settle at 96.87 cents a gallon. Heating oil fell 3.42 cents to settle at $1.40 a gallon while natural gas for January delivery rose 10.7 cents to settle at $5.686 per 1,000 cubic feet.

In London, January Brent crude rose 77 cents to settle at $42.20 on the ICE Futures exchange.

------

Associated Press writers George Jahn in Vienna, Austria, Tomoko A. Hosaka in Tokoyo, Alex Kennedy in Singapore and Martin Crutsinger in Washington contributed to this report.