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Inventory Data Ignite Oil

Falling crude stocks bring buyers into the July contract.

Updated from 2:33 p.m. EDT

An unexpected rise in crude inventories sent energy futures spiking Wednesday.

Crude for July delivery closed up about $1.31 to $50.98 a barrel, vaulting above technical resistance at $50.50, after the Energy Department said inventories slipped by 1.6 million barrels last week. Analysts had been forecasting a 1.2 million-barrel increase in inventories.

The same report showed a 1.9 million-barrel build in distillate stocks and a 600,000-barrel rise in gasoline inventories. Both exceeded expectations, although gasoline futures rose 3 cents to $1.45 a gallon.

For crude stockpiles, it was the first decline in six weeks and only the second in 15 weeks, a stretch that has seen inventories rise to their highest level in six years to 332.4 million barrels.

"The scope of the draw was surprising," said Rick Mueller, senior oil analyst at Energy Security Analysis Inc. "But the products numbers are more bearish, meaning refiners are doing what they are supposed to do -- make more gasoline." Refinery utilization rose to 94.6% in the report, up from 94% in the previous week.

"Gasoline inventories are now over 215 million barrels, which is very reassuring ahead of the start of the driving season," Mueller said.

Prices have responded to the three-month build in inventories by falling about $7 from their April high, but speculative trading, generally attributed to hedge funds long the futures contract, has kept prices in a recent range of $48 to $52 a barrel.

Also keeping prices from slipping is demand from China. The Chinese National Development and Reform Commission said Wednesday that China would consume 170 million tons of refined oil products in 2005, 8% more than it did last year,

Reuters

reported. That is below last year's 19% growth, said Zhu Hongren, vice director of the commission's Economic Operations Bureau.

China's gross domestic product growth has also eased in 2005. Many economists are predicting an 8.5% growth rate compared with 19% in 2004. "It might be 8% or it might be 10%, but who cares, it's still a growth story ... China's dependence on oil is going to rise," said Donald Straszheim of Straszheim Global Advisors who specializes in the Chinese market.

China currently imports about 3 million barrels a day, and produces about the same amount. In 2004, China consumed about 5.9 million barrels a day in 2004, up from 4.6 million in 2000, according to Straszheim's research.

In corporate news,

Diamond Offshore

(DO) - Get Report

was reportedly raised to neutral from underweight by J.P. Morgan analyst Michael LaMotte. The analyst said that as a result of the company's $1.2 billion backlog announcement Tuesday, it looks better positioned in the U.S. Gulf and Brazilian markets. He also bumped up his earnings estimate for 2005 to $1.70 a share, from $1.60, and to $3.80 a share from $2.90 in 2006.

Bear Stearns also raised its rating on Diamond Offshore from underperform to peer perform, citing the new pending contracts and higher dayrates. Shares rose $2.58, or 5.95% to $45.91.

Other companies in the drilling industry are enjoying a run-up in share prices Wednesday.

Atwood Oceanics

(ATW)

added 5% to $55.09, and

Pioneer Drilling

(PDC)

rose 3.41% to $12.43, and

Todco

TheStreet Recommends

(THE)

gained 3.17% to $21.79.

Shares of

GlobalSantaFe

(GSF)

are leading the Philadelphia Oil Service Sector Index higher Wednesday with a 2.3% jump. The oil and gas driller said it plans to repurchase a series of zero coupon convertible debentures due 2020 at a price equal to $594.25 per $1,000 of principal amount, for a total of $356.6 million in cash. The index climbed 1.9%.

California power generator

Calpine

(CPN)

said it plans to cut its debt by $3 billion by the end of 2005 by selling power and gas assets and refinancing. The company will sell up to eight plants. Shares shot up 26.3% to $2.50.

Shares of most major oil producers rallied after oil prices spiked.

Exxon Mobil

(XOM) - Get Report

rose 1.51%;

Chevron

(CVX) - Get Report

gained 1.50%;

ConocoPhillips

(COP) - Get Report

increased 1.68%;

Royal Dutch/Shell

(RD)

rose 0.68%; and

BP

(BP) - Get Report

added 1.32%.