Crude Oil Hits Two-Week High

Oil services shares jump after a recent downturn.
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Updated from 2:15 p.m. EDT

Prices of oil futures continued their rebound on Tuesday, boosted by an inflow of bargain hunters and concerns that an active hurricane season would wipe out Gulf Coast oil production.

Light, sweet crude for July delivery rose $1.80 to nearly a two-week high of $71.76 a barrel, helped in part by a fire at a gulf refinery. On Monday, the contract sank to a seven-week low of $68.17 a barrel before it rallied to close at $69.23.

Meanwhile, shares in oil services companies such as drillers rose sharply after a recent selloff. Investors likely thought the declines were too extreme and returned to the market looking for more attractive price tags.

"The quickness of the recovery shows how rapidly money flows in to and out of the markets," said John Kilduff, vice president of risk management at Fimat USA in New York. "The movement of this marginal money, which flows in at the top and out at the bottom, should keep prices in a fairly predictable band."

Oil futures had been sinking on worries high energy prices were shaving demand and boosting inflation. Traders have been concerned the

Federal Reserve

would continue raising interest rates to slow down the economy, which would inevitably cut demand for crude and drive down prices. Last week, the contract lost 5%.

Production at

Valero Energy's

(VLO) - Get Report

190,000 barrel-refinery in St. Charles, La. has been processing lower amounts of gasoline and low-sulfur diesel since a fire on Saturday. By the end of the week, production of gasoline, which is down by 25,000 barrels, should be back to normal. Diesel output has been cut from 55,000 barrels, but should recover to 10,000 barrels by the weekend.

The National Oceanic and Atmospheric Administration's hurricane forecast, released on Monday, was still lending support to rising crude prices. The government's outlook said this year's hurricane season will be "above normal" with 13 to 16 named storms and eight to 10 hurricanes. At least four of them will be hurricanes of Category 3 strength or higher.

The report, though, fell short of last year, when there were 28 storms, 15 of which became hurricanes. Two of those, Katrina and Rita, destroyed or damaged pipelines and offshore platforms and drove crude prices to record highs. A week before hurricane season begins, 22% of the Gulf Coast's oil production remains down and 13% of its gas output is offline.

The largest platform damaged in the Gulf of Mexico has returned to partial production,

Royal Dutch Shell

(RDS.A)

said, and should be back at pre-Katrina levels by the end of June. Before the hurricanes, the Mars platform produced 5% of the area's oil and natural gas production, or 140,000 barrels of crude and 150 million cubic feet of natural gas.

Oil prices have jumped 18% this year on lower production in the Gulf of Mexico, Nigeria and Iraq. Threats to crude exports from Iran, the world's fourth-largest producer, have also pumped up prices. The members of the U.N. Security Council meet Wednesday to discuss a package of incentives aimed at getting Iran to suspend its nuclear program. But last week, Tehran said it would not stop enriching uranium.

OPEC will meet next week in Caracas to discuss the group's production volumes, though some members have said they expect them to remain at record levels. The group, which pumps 40% of the world's crude, has been running at full tilt to meet global energy demand. At current prices, the group, despite its power, cannot affect prices significantly, according to U.S. Secretary of Energy Samuel Bodman.

"The producers of crude oil have ceded to the traders the setting of price and that's different than has existed," Bodman told

Reuters

at an energy conference Tuesday.

The rally in crude prices and the Valero fire were propping up wholesale gasoline and heating oil, which jumped 5 cents to $2.10 a gallon, and 7 cents to $1.99 a gallon, respectively. Any loss in production is considered bullish for the market.

Analysts surveyed by

Bloomberg

were calling for a rise of 1.2 million barrels from 206.4 million barrels of gasoline last week as refiners returned to full production and imports surged. Distillates, which include heating oil and jet fuel, probably rose by 500,000 barrels to 115.1 million barrels.

Refiners have been operating at lower run-rates as they phased in ethanol and switched to summer blends of gasoline. Last week, refiners likely increased their capacity to 90.3%, up from 89.8% the previous week. Their recovery is expected to increase ahead of the Memorial Day weekend, the kickoff to the peak summer driving season.

As gasoline production ramps up, crude, which is processed into gasoline and other petroleum products, like dropped by 1 million barrels from 346.9 million barrels. The U.S. Energy Department will release its weekly petroleum supply report at 10:30 a.m. EDT Wednesday.

Predictions of another round of strong hurricanes, warming weather and higher demand underpinned natural gas prices, which closed down 2 cents to $6.26 per million British thermal units. Factories and utilities have been switching from pricey heating oil to cheaper natural gas.

Blistering weather forecasts in the Midwest this week were also underpinning natural gas prices. From May 28 to June 6, the National Weather Service's Climate Prediction Center predicts, temperatures will soar into the 80s and 90s. Chicago, for instance, will hit 85 degrees, up from a normal 72 degrees.

Rising oil prices boosted energy stocks in trading Tuesday. The Philadelphia Oil Service Index and the Amex Oil Index each climbed 2%.

Cameron

(CAM)

,

Baker Hughes

(BHI)

and

Global Industries

(GLBL)

were leading the rise, up between 4% and 5%.

Among oil drillers,

Marathon

(MRO) - Get Report

,

Valero Energy

(VLO) - Get Report

and

Total

(TOT) - Get Report

increased 4% to 5%.