Crude Halts Three-Day Slide

Updated from 1:15 p.m. EDT

Crude futures halted a three-day slide Thursday, rising despite an Energy Department report that showed Katrina's damage to U.S fuel inventories last week was not as bad as expected.

After slipping as low as $63.10 a barrel in early trading, October crude closed up 12 cents to $64.49 a barrel. The contract lost $5, or 7%, over the previous three sessions.

Gasoline futures rose 2 cents to $2.04 a gallon.

According to the Energy Department, crude inventories fell by 6.4 million barrels last week, while gasoline inventories dropped by 4.3 million barrels. Distillates were down by 800,000 barrels. For each category, the magnitude of the decline was slightly less than expected.

"The report is bearish relative to expectations, that's why we came under selling pressure," said Tim Evans at IFR Markets. "If that is the worst of Katrina, then we are in a pretty good shape."

Evans has little doubt that crude inventories will recover as imports from Europe arrive at U.S. ports. He expects next week's crude inventories to remain unchanged.

As for distillates, which include heating oil and diesel fuel, a slight drop in inventories means to Evans that this is a "fundamentally bearish market."

"If we needed a hurricane to create a slight draw in distillates, it means there is plenty to go round. There is no shortage there."

Other bearish factors continue to act on energy. As Gulf Coast capacity is slowly rebuilt, additional crude from Europe is expected to contribute feedstock for refineries that produce high-grade products such as jet fuel and gasoline. Two million barrels a day of reserve petroleum is scheduled to start pouring into U.S. energy markets starting this week.

Meanwhile, estimates of U.S. oil demand continue to come down as analysts factor in the impact of higher prices. On Wednesday, the Energy Department put 2005 demand at roughly 20.83 million barrels a day in the U.S., down about 60,000 barrels from its month-earlier report.

Bulls, meanwhile, see crude demand growing as high natural gas prices force plants to use oil for power generation.

Since Katrina hit, natural gas prices have surged more than 20%, recently trading at $11.03 per thousand cubic feet. Year to date, the natural gas front-month contract is up 87%, according to Raymond James.

The U.S. government estimates 8 billion cubic feet of daily gas production has been lost due to the storm and analysts fear the market will lose 100 billion cubic feet by October.

"It is fairly easy to replace 30 million barrels of lost crude. Because crude is traded globally, you can get it from elsewhere. But natural gas trades in a local market. It's very hard, even impossible, to replace lost production," said Michael Lynch, president of Strategic Energy and Economic Research.

In some good news, the Energy Department said Thursday that natural gas in working storage rose last week by 36 billion cubic feet, more than analysts had expected. At 2.7 trillion cubic feet, natural gas levels are higher than the five-year average but about 100 billion cubic feet les than the country had a year ago.

Offshore oil and gas producers and refineries are continuing to report progress in resuming operation and restarting production, though many operations are going to remain shut for repairs for several months. About 55 drilling rigs were either heavily damaged or have sunk.

Chevron's(CVX Quote) giant Pascagoula, La., refinery remains off line, but the damage was reportedly not devastating.

U.S. Energy Secretary Sam Bodman said in a CNBC interview that 4% to 5% of U.S. refining capacity is likely to remain curtailed for months.

In company news, Rowan Cos. (RDC Quote) said it has located the wreckage of its jack-up rig which capsized and sank in 155 feet of water offshore Louisiana during Hurricane Katrina. It said the rig was insured for about $1.1 million more than its carrying value, but the cost of its removal is expected to exceed the $5 million annual deductible.

Schlumberger(SLB Quote) said it expects to resume full operation at its Gulf of Mexico facilities within five weeks. It noted that the main set back for restorations was the absence of communications systems in the New Orleans area.

Among the majors shares were mixed Exxon Mobil(XOM Quote) fell 0.5%, ConocoPillips(COP Quote) climbed 0.7%, and BP(BP Quote) dropped 0.6%.