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After Tuesday's Lull, Oil Soars Anew

New reports of shrinking supply pushed prices higher.

After easing slightly the day before, oil prices bounced back Wednesday, soaring to yet another 10-year high after new reports showed domestic oil supplies shrank for the second week in a row.

In its last trading session before expiring, the October contract for crude oil climbed as high as $37.80 a barrel on the

New York Mercantile Exchange

before setttling at $37.20 a barrel, up 69 cents. The November contract settled at $35.25 a barrel, a gain of 24 cents.

Industry analysts point to new inventory data as the catalyst for Wednesday's price action. In its weekly report released late Tuesday, the

American Petroleum Institute

, an industry group, said crude oil stocks fell 2 million barrels last week, after a decline of a half-million barrels the week before.

While oil prices eased slightly after the

Organization of Petroleum Exporting Countries

agreed last week to raise production by 800,000 barrels a day starting next month, the new inventory data left analysts wondering if OPEC's planned increase will be enough to replenish dwindling domestic inventories in time for winter.

"OPEC says they might do more, but the API shows we have less," noted Phil Flynn, an analyst at Chicago-based

Alaron Trading

, in his daily commentary. "A shortage by any other name...well, it's still a shortage."


Energy Information Administration

, the statistical branch of the

Department of Energy

, reported that crude oil stocks shrank even more -- by 2.4 million barrels last week, after decreasing 1 million barrels the previous week. But both the EIA and the API reported an increase of 1.3 million barrels in the level of distillate stocks, which include diesel fuel and heating oil.

Though the small increase in heating oil stocks is a step in the right direction, Flynn said the build-up is far short of what is needed to ease fears about the forthcoming winter. He added that crude oil stock levels are so low now that no production increase is likely going to improve the situation anytime soon.

In addition, since OPEC announced its agreement last week to raise its output target to 26.2 million barrels a day, analysts and industry groups have said that the actual increase is not likely to be anywhere near its goal of 800,000 more barrels a day, since many OPEC members are already producing at or above capacity.

While OPEC's president, Ali Rodriguez, has been reported as saying the organization may consider revising the output agreement if prices remain high, analysts question whether some of OPEC's members are even capable of meeting the Oct. 1 output level increase.

Current forecasts among analysts range from an actual net increase of just 100,000 additional barrels to about 300,000 more barrels a day -- far less than OPEC's production quota increase would indicate.

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Only Kuwait, the United Arab Emirates and Saudi Arabia, the world's largest oil exporter, are believed to have enough capacity for substantial production increases. And


, a London-based financial services firm, said the oil output for these three countries in August was already higher than the newly approved production ceilings.

Further complicating matters are the growing tensions between OPEC members Iraq and Kuwait. Iraq is accusing neighboring Kuwait of stealing oil, the same allegation it made in 1990 before invading Kuwait. The conflict has also raised concerns that Iraq could use the current crisis as an excuse to cut its oil production.

Despite fears of tightening oil supplies, the


administration still appears reluctant to release oil from its

Strategic Petroleum Reserve


That may change if the price continues to climb, said Matthew Warburton, an oil analyst at

UBS Warburg

. Depending on the quantity released from those reserves, and the inventory levels, Warburton said such a move could result in a substantial reversal in oil prices.

"Clearly the higher prices are starting to bite into world economic growth," Warburton said. "We're entering a critical phase in terms of how the producing and consuming countries resolve the issue."

But Thorsten Fischer, an economist at

, said a decision to tap into the strategic reserves is not imminent and remains unlikely. The administration has not resorted to such a measure since the Persian Gulf war.

"The president is reluctant because it would be seen by many as an intervention in the market," Fischer said. "It's a pretty drastic measure."

With OPEC's production increase more than a week away, and oil prices setting new 10-year highs on a daily basis, analysts say oil may reach $40 a barrel before supplies increase enough to pull prices back.

Even if prices increase in the short term, however, Warburton and other analysts say they are still likely to come down next year on their own, as demand decreases and inventories are replenished.

But, with inventories far below last year's levels and little reassurance that supplies will grow enough in the near term to meet current demand, Americans are likely to feel the effect of higher crude oil prices in the fall and winter -- paying more for gas and for heating oil than they did last year.

Wednesday, the October contract for heating oil settled nearly unchanged at $1.0179. The October contract for unleaded gasoline ended the day up 2.12 cents at 98.45 cents.

"The situation is pretty critical," Fischer said. "The draw in crude oil was more than expected and refineries are operating near capacity. There's no reason to expect any relief anytime soon."