Oil Edges Up on Simmering Mideast Tensions, Colder Weather

Mixed messages from the world's oil producers, concerns over simmering tensions in the Middle East, and colder temperatures in the Northeast pushed oil prices within a couple dollars of recent decade-highs on Monday.

The benchmark contract for January delivery of crude oil traded as high as $35.80 a barrel before easing back 19 cents to finish at $35.22 on the New York Mercantile Exchange. Oil prices reached a 10-year high of $37.80 in late September.

Industry analysts say that oil prices have been supported recently by lingering concerns that continued Israeli-Palestinian violence might spill over into nearby oil-producing countries, and by comments from members of the Organization of Petroleum Exporting Countries indicating the cartel is not likely to boost production again in the near term. In fact, the group seems likely to lower its production ceiling as stock levels rise and prices begin to ease.

But industry and government reports have not yet shown a substantial buildup in domestic inventories. Recent data showed that while domestic oil inventories rose last week on the West Coast, supplies fell substantially in the rest of the country.

"If prices are to achieve any sense of normalcy, some kind of a breather during which stocks are permitted to build is essential," said Tim Evans, senior energy analyst at IFR-Pegasus.

Instead, prices continue to climb in the absence of evidence of any substantial stock level increases. Over the weekend, there were reports that Venezuelan oil minister and OPEC president Ali Rodriguez tried to reassure markets, saying that prices should fall once oil stock levels rise. He indicated that while government and industry data on primary stock levels has not reflected recent production increases, many factories and electricity generators have built up their secondary and tertiary stocks because of price hike fears.

Meanwhile, Saudi Arabia -- widely believed to be the only OPEC member left with substantial excess oil production capacity -- reiterated that it could produce around 10.5 million barrels per day (an additional 1.8 million barrels daily) in 90 days, if needed. But the world's largest oil exporter added that consumers should first wait for the impact of the last two production increases to take affect.

OPEC has approved two recent production oil output increases, totaling about 1.3 million additional barrels per day. In addition, by last week, the government had distributed about half of the 30 million barrels of crude oil ordered released from the nation's Strategic Petroleum Reserves in late September.

But concerns of dwindling supplies are likely to keep prices higher until domestic stock levels have built up. Analysts at London-based GNI concluded Monday that there will either have to be a warming of temperatures in the Northeast, or an increase in stocks to bring prices back down.

In the meantime, Phil Flynn, energy analyst at Alaron Trading, predicts that "a good, old fashioned winter and continued talks of OPEC production cuts will keep the markets on edge."