Oil Jumps Amid Supply Fears

Heating oil and natural gas prices rose as well.
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Oil prices climbed anew Wednesday on fears that domestic oil supplies would fall short of demand, as new data showed that while oil inventories rose sharply on the West Coast, supplies fell substantially in the rest of the country.

Heating oil and natural gas prices rose as well, pushed up by cold weather in the Northeast as well as tightening supplies.

Crude oil for December delivery jumped back above $35 a barrel on the

New York Mercantile Stock Exchange

on Wednesday -- coming within a few dollars of the 10-year

high of $37.80 set in September. On Wednesday afternoon, the December futures contract settled up 71 cents at $35.58 a barrel.

December heating oil closed up 2.3 cents at $1.071 a gallon, after rising as high as $1.086. And December natural gas settled up 25 cents at $6.265 per million British thermal units, after hitting an all-time high of $6.32.

API, EIA Report

The

American Petroleum Institute

, an industry group,

reported that crude oil stocks rose by an estimated 2.5 million barrels last week, after remaining unchanged the week before. But the

Energy Information Administration

was more conservative in its findings, reporting a 1.5-million-barrel increase last week, after a decrease of about the same amount the previous week.

The EIA reported that crude oil stocks grew by 4.5 million barrels in the region west of the Rocky Mountains, and by 1.6 million barrels in the East Coast, while stock levels in the remaining three regions fell. The market largely ignored the buildup of oil in the region west of the Rocky Mountains, as it is isolated from the rest of the country and tends to have less of an impact on market prices than supply movements in other areas do.

Tim Evans, senior energy analyst at

IFR-Pegasus

, said the disparity in regional levels is likely more of a problem of logistics than of dwindling supplies. Still, he said the modest overall buildup in inventory levels still leaves him wondering where the 12 million barrels of oil already released from the nation's

Strategic Petroleum Reserve

-- as well as added supplies from the two recent production increases implemented by members of

Organization of Petroleum Exporting Countries

-- have gone.

Concerned about rising heating oil prices,

President Clinton

ordered the

release of 30 million barrels from the Strategic Petroleum Reserve in late September. The

Department of Energy

awarded the final contracts for the oil late last month and has so far delivered about 14.235 million barrels, according to Drew Malcomb, a department spokesman.

Oil Deliveries Steady

Malcolm said oil deliveries to various petroleum companies has been relatively steady since late last month. However, he added that evidence of the additional oil may not appear in the inventory data for weeks after the oil has been released from the reserves.

Until the highly anticipated barrels of oil "surface in some more dramatic fashion," Evans predicts that oil prices will continue to trend higher.

Adding to supply concerns were comments earlier this week from OPEC officials indicating that another production increase is unlikely. OPEC members left production levels alone at their meeting over the weekend, though they have approved two production increases in the past six weeks, most recently

raising output by a half-million barrels a day on Oct. 31.

Distillate Levels Drop

Meanwhile, domestic inventory levels of distillates, which include diesel fuel and heating oil, fell last week after building up the two previous weeks. The API reported that distillate stock levels fell by 100,000 barrels while the EIA reported a half-million-barrel draw last week.

Still, few believe that the current oil and gas price levels are sustainable. Once inventory levels better reflect the recent OPEC production increases and the release of oil from the Strategic Petroleum Reserve, prices should begin to ease back toward the $30 mark.

The EIA expects crude oil prices to fall by as much as $5 a barrel by the end of winter, if the world oil market balance remains in line with the agency's projections. The monthly U.S. imported crude oil price in October averaged $30.75 a barrel, about $1.10 less than in September, but still the second-highest monthly average level in the decade since the Persian Gulf War. The benchmark contract for crude oil averaged about $33.10 a barrel in October.

"Israeli/Palestinian tensions notwithstanding, we do not see how prices can remain detached from the corrective forces of the world market if production is as high as is implied by OPEC statements and by typical estimates of non-OPEC output currently in circulation," analysts wrote in the EIA's monthly outlook for November.

Higher oil and natural gas prices may be hurting consumers, but the recent climb in commodity prices is good news for the exploration and production sector. Higher oil prices helped many exploration and production companies achieve record earnings in the last quarter, and have spurred new domestic and overseas exploration activity.

Deutsche Banc Alex Brown

is forecasting 15% to 20% spending growth next year, on pace with 2000 but with a greater focus in 2001 outside North America. Drilling growth would have to match this pace for oil and gas supply to meet demand.

Bob Christensen, an analyst at

FAC Equities

, a division of

First Albany

, now forecasts that the sector's stocks will climb as much as 50% by the end of the first quarter of 2001.

After their rapid rise earlier this year, Christensen said he was not surprised that oil and gas exploration and production stocks lost about 9% of their value in recent weeks. But the analyst, who held onto his "strong buy" ratings on nearly a dozen stocks in the sector, said the damage is done and has recommended investing again in the sector.

Christensen recommends 11 stocks, all of which he says are undervalued and poised to grow by 50% to nearly triple over the next year, buoyed by lower-than-normal inventory levels, increased demand as temperatures drop, and near-record oil and gas prices.

Christensen's picks include

Anadarko Petroleum

(APC) - Get Report

,

Apache

(APA) - Get Report

;

Devon Energy

(DVN) - Get Report

;

EOG Resources

(EOG) - Get Report

and

Newfield Exploration

(NFX)

.

The analyst also recommends "value-oriented" names like:

Burlington Resources

(BR) - Get Report

;

Barrett

(BRR)

;

Pioneer Natural

(PXD) - Get Report

;

Questar

(STR)

;

Western Gas Resources

(WGR)

and

Unit

(UNT) - Get Report

.

Duetsche Banc analysts agreed that exploration and production stocks are "selectively compelling." Though those analysts are not as optimistic in their earnings growth projections as Christensen, two of them, David Bradshaw and John Bailey, said they saw an average of 13% upside potential in the stock prices. In a recent note to investors, the Deutsche Banc analysts said the valuation of companies in the sector is "as good as it gets" for entry.

In a separate research note released Wednesday, Deutsche Banc said the fundamental news does not justify the sag in sector prices recently and attributed the drop to volatile natural gas prices and mixed messages about crude oil supplies and prices.

"To us, the macro prospects for the upstream remain as good as they have been in a long, long time," the firm said. "Company specifics are good and getting better, and compelling valuation is just too good to be dismissed."