Crude Closes at New High

Updated from 2:33 p.m. EDT

Crude had its highest close ever Friday, as chart-related speculation and robust demand for distillates and gasoline continued to feed a rally.

The August crude contract closed up 42 cents to $59.84 a barrel on Nymex after briefly eclipsing $60 for a second straight session. Gasoline futures held at $1.65 a gallon.

Bulls have bid up the contract since Wednesday, when an Energy Department update showed surprisingly strong U.S. demand for distillates, including heating oil and diesel. The report showed a higher-than-expected 7% jump in demand for distillates compared with a year ago, and a 3.4% jump in jet-fuel demand. The latter is sometimes viewed as a proxy for economic activity.

Refinery capacity constraints, a serious bottleneck that hasn't been addressed with any significant answer such as additional construction, are still the main source of concern as expected fourth-quarter demand threatens to exceed refined supplies.

Also spreading through the markets recently have been arguments put forward in a book on Saudi oil by Matthew Simmons. His Twilight in the Desert argues that not only is Saudi production close to peaking, but that that country's proven reserves estimates might be misleading, and too optimistic.

OPEC has recently raised its production ceiling by 500,000 barrels a day to 28 million barrels, a move that was shrugged off by a tight and bullish oil market that seems to respond only to bad news.

Oil prices are now more than $25 higher than they were in the beginning of 2004.

With the latest developments in the Cnooc(CEO Quote) battle for Unocal(UCL Quote), concerns over China's growing appetite for oil have gained currency.

Other data suggest they're overblown. Total oil demand growth has decreased to about 7% in 2005, compared with 15% growth in 2004, according to Wenchao Su, an oil analysts specializing in the Chinese market for Energy Security Analysis Inc. Perhaps more significantly, refined product imports, especially fuel oil, which represents 70% of all product imports, have declined to the lowest level in 25 months, Su says.

China is also investing heavily in Liquefied Natural Gas in an effort to reduce its exposure to crude oil, according to the firm. It plans to increase natural gas consumption to 10% of its total energy consumption by 2020, up from the current 3%. Further, coal represents 75% of total Chinese energy consumption, Nuclear energy is about 5%. That leaves oil at 17% of its total energy consumption, about 7 million barrels a day, which could decline over time as other energy sources are introduced.

Elsewhere, Merrill Lynch wrote in a note Friday that "the consensus view is that demand is inelastic at higher prices, production or supply growth lags demand, and that inventories don't matter." The analyst group raised its 2005 oil price assumptions to $52.75 a barrel, from $48.