Crude Moves to Four-Month High

Traders get bullish ahead of the inventory data.
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Updated from 11:53 a.m. EST

Crude closed at a four-month high Wednesday as traders placed long bets ahead of a potentially bullish report on U.S. fuel inventories.

February crude gained 21 cents to close at $63.35 a barrel, clearing the two-month high it set on Tuesday. Natural gas shed 44 cents to $10.19 per million British thermal units, its lowest level since August.

Heating oil and unleaded gasoline both added 2 cents to $1.81 a gallon and $1.78 a gallon, respectively.

The Energy Department releases its weekly petroleum and natural gas inventory reports at 10:30 a.m. EST Thursday, a day late because of Monday's holiday. Analysts expect a drop in crude supplies of between 200,000 and 2.4 million barrels, and a drop in gasoline stocks of about 1 million barrels. Estimates for distillates are mixed, from a drop of 1.2 million barrels to an increase of 800,000 barrels.

Natural gas stocks should fall by roughly 150 billion cubic feet because heating demand typically exceeds domestic production during the winter. Utilities store gas supplies in more than 400 underground reservoirs and caverns and withdraw the fuel from November through April.

Crisis Averted

Crude spent most of the day in the red after the Ukraine agreed Wednesday to pay Russia $95 per thousand cubic meters of natural gas, almost double what the former Soviet republic had been paying. The new rates will go into effect Jan. 1 and will fluctuate with the market, the

Associated Press

reported.

Gazprom, Russia's state-owned gas company, slashed natural gas shipments to Ukraine on Sunday after the former Soviet republic refused a fourfold hike in prices. Russian officials had wanted to increase the price it charges to Ukraine from $50 per thousand cubic meters to $220 to $230.

Western Europe receives about a quarter of its natural gas from Russia, and the majority of it is delivered via pipelines across Ukraine. European countries complained Monday that their supplies were dropping and questioned the wisdom of relying on Russia for much of their natural gas. Shipments to Europe appeared to be back to normal Wednesday.

The move came at an auspicious time. Russia assumed the rotating presidency of the Group of 8, a collection of the world's industrialized nations, amid criticism that Russian President Vladimir Putin is trying to reassert Russia's role as a superpower. Detractors have said Russia has a shoddy human rights record and doesn't deserve the chairmanship.

Money Flows

Tuesday's rally in crude also reflected fresh speculative money flowing into the market. After a 40% rise in the front-month contract last year, investors have been increasingly eager to sample commodity markets as an alternative to stocks. Natural gas prices climbed 94% in 2005 after hurricanes shuttered platforms and refineries in the Gulf of Mexico.

Still, the new money flowing into the energy sector may not reap immediate gains.

"With moderate weather dominating and a surplus of both crude and heating oil, prices are more likely to decline," said John Kilduff, senior vice president of energy risk management at Fimat USA in New York. "Unless a sustained bout of cold materializes, this could very well be the window of opportunity for stockpile replenishment which could keep prices under pressure, OPEC notwithstanding."

Warmer-than-normal temperatures should blanket much of the country, according to the National Weather Service's six-to-10-day forecast through Jan. 13. Cloudy to partly cloudy skies, with temperatures ranging from the teens to 40s will cover the Northeast Wednesday, according to Weather.com. Highs in the 30s to 50s will dominate in the Midwest, but will plunge into the 20s in the Upper Midwest Thursday. Rain and snow is expected to spread across the region starting tonight and cold weather should arrive by the weekend.

Indonesia's OPEC governor said Wednesday the group of 11 producing countries should not cut output at its meeting Jan. 31. He said some of OPEC's members would like to reduce daily output by 1 million barrels or 3% in the second quarter from a total of about 30 million barrels per day. The group has projected an oversupply of 2 million barrels per day in the second quarter.

"If the price stays about $60 a barrel, then OPEC shouldn't cut output," Maizar Rahman told reporters in Jakarta,

Bloomberg

reported.

When oil prices are high, Indonesia only pumps around two-thirds of its quota and is forced to import more than it pumps.

The Organization of the Petroleum Exporting Countries, which pumps 40% of the world's oil, agreed last month to maintain production to help Northern Hemisphere countries get through the winter.

Meanwhile, in trading Wednesday, the Amex Oil Index was gaining 0.4% and the Philadelphia Oil Service Sector Index was increasing 1.3%. Shares of the super majors were mixed, with

BP

(BP) - Get Report

picking up 0.5% to $66.73;

Total

(TOT) - Get Report

rising 0.1% to $130.15, and

Chevron

(CVX) - Get Report

dipping 0.4% to $58.86.

Exxon Mobil

(XOM) - Get Report

was gaining 0.3% to $58.61 after Banc of America Securities upgraded the stock from "neutral" to "buy" and recommended it as a "top pick" for this year.

Chevron made its second deepwater oil discovery at its Knotty Head prospect in the Gulf of Mexico, the company said in a release Wednesday. The well has 300 feet or more of net oil pay, or oil that can be pumped and is at a depth of 25,127 feet. The discovery came on the heels of Chevron's other deepwater discovery in the Gulf of Mexico last month. That well, which Chevron said is the gulf's deepest, has 600 feet of net oil pay. Oil companies are drilling at deeper and deeper depths as demand spikes and more shallow wells dry up.