Crude Futures Shoot Higher

Updated from 2:31 p.m. EDT

Crude inventories plummeted and gasoline inventories unexpectedly rose last week, confounding analysts' estimates and snapping energy traders into buying mode.

According to the Energy Department, crude inventories fell by 6.6 million barrels last week, about three times the expected decline. Gasoline inventories, meanwhile, rose by 1.9 million barrels; they were expected to fall by 2 million. Inventories of distillate stocks fell by 1.1 million barrels.

Crude for October delivery, which was up about 80 cents prior the report, closed up $1.98 to $65.09 a barrel on Nymex. The contract remains down about 8% since Hurricane Katrina struck Aug. 29.

Unleaded gasoline, which has fallen 35% since Katrina, was up about 4 cents to $1.93 a gallon.

"The energy space is strong for a few reasons," Said Randy Diamond, trader at Miller Tabak. "We're still missing refining capacity, and even though we have replaced missing oil by importing from overseas, it's still more expensive to import the refined product than to refine it ourselves."

Diamond added that "we are in peak distillate producing season, specifically heating oil, but petro data still showed a draw" in distillates.

Last week's report showed gasoline stocks sitting beneath the low end of their seasonal average. Many predict tight gasoline inventories will leave the U.S. little choice but to import more finished products. Before Katrina, the U.S. imported about 1 million barrels a day of gasoline.

Wednesday's inventory results reflect a two week long process in which refineries have gradually restarted some 10% of U.S. production that was curtailed by Katrina.

The latest data from the Energy Department said four of the five hurricane-struck refineries are likely to remain shut for an extended period. These include Chevron's(CVX) Pascagoula, Miss., plant; Exxon's(XOM)Chalmette, La., refinery; ConocoPhillips'(COP) Belle Chasse, La., refinery; and Murphy Oil's(MUR) refinery at Meraux, La.

Meanwhile, those refineries that have managed to restart appear to be producing a lot of gasoline.

"It looks like the refineries in the Gulf Coast managed to recover most of the lost production," said Jim Williams at WTRG Economics. "This is fairly encouraging."

The gain in gasoline inventories is also attributable to skipped maintenance periods at refineries that weren't harmed by the storm, Williams said. In addition, some refined gasoline was probably released to the market after being stranded by pipeline problems, he said.

"But this week's rise in gasoline stocks doesn't mean we won't see a steep decline next week," Williams said.

Meanwhile, the natural gas market in the U.S. remains tight, with data showing 37% of Gulf of Mexico output still stranded.

In company news, EnCana(ECA) and Kerr McGee(KMG) said they have made a "promising oil discovery" in waters off Brazil. A three-day production test of an exploration well yielded rates of 1,800 barrels a day of crude oil. The companies estimated that a single well such as this is capable of delivering more than 5,000 barrels a day, although the crude quality is on the heavy side.

GlobalSantaFe(GSF) said its fullyear earnings will be hurt by Katrina. It reported that three of its rigs in the Gulf that sustained damage are won't be operational until next quarter. A fourth rig will remain shut for repairs until the first quarter of next year.

GlobalSantaFe does not expect this to hurt its 2006 earnings. Its shares rose 99 cents, or 2.8%, to $44.35.

Among energy stocks, shares rose Wednesday. Exxon Mobil climbed 0.7%, ConocoPhillips increased 1.8%, Chevron added 0.5% and Amerada Hess(AHC) rose 1.6%.

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