Crude Falls as Traders Shorten Up

Updated from 1:53 p.m. EDT

Oil prices dropped Friday as traders exited long positions ahead of the weekend. OPEC is scheduled to meet in Vienna on Monday to decide whether it will increase its formal production quotas by 500,000 barrels a day.

Crude for October delivery closed down $1.75 to $63 a barrel on Nymex. Gasoline futures dropped 11 cents, or 6%, to $1.78 a gallon.

"We are seeing a dropoff in demand coupled with a seasonal weakness in gasoline," says Phil Flynn, market analyst at Alaron Trading. "The selloff was also triggered by the lowest consumer confidence number in 13 years."

Meanwhile, Deutsche Bank upgraded Exxon Mobil(XOM Quote) based on expectations for higher oil prices lifted energy stocks. Exxon, which was raised to buy from hold, rose nearly 2% to $63.63, BP(BP Quote) climbed slightly, and ConocoPhillips(COP Quote) added 1.8%.

"We think that demand is so tight that demand destruction is needed," said Deutsche Bank's analyst Paul Sankey in a note to inventors. "With conservative demand figures, we still see huge refining margins and high prices, [and] one more year of oil outperformance."

Deutsche Bank increased its long-term oil price estimate to $40-$50 a barrel, up from $30-$40, citing ongoing supply tightness. It also sees refining margins reaching $22 a barrel in 2006.

"The market keeps calling the top of the cycle and getting it wrong," Sankey wrote. "Buying the oils is a safe alpha bet, because even if the prices fall, [the price to earnings ratio] can expand. Ignore the graphs; these stocks are cheap."

Deutsche Bank also cut Amerada Hess (AHC Quote) to hold from buy on the basis of valuation. Its shares fell 1.4% to $134.07.

Oil prices are roughly 10% below the all-time high of $70.80 reached a day after Hurricane Katrina slammed into the Gulf Coast on Aug. 29, but are still roughly 47% higher this year.