Late Buying Lifts Crude

Oil jumps in a delayed reaction to a big crude inventory draw.
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Updated from 3:13 p.m. EST

Energy prices caught a late bid and closed higher Wednesday following a government report that showed a steep drawdown in crude inventories last week.

Crude for January delivery closed up 85 cents to $57.35 after the Energy Department said U.S. inventories of the fuel fell by 4.2 million barrels, a much bigger decline than analysts expected. Still, supplies remain 10.3% above their year-ago level.

The same Energy Department report showed a 545,000-barrel decline in gasoline inventories and a 3.31 million-barrel build in distillates.

Gasoline futures finished up 5 cents at $1.44 a gallon while natural gas rose 83 cents to $12.57 per million British thermal units. Heating oil lost a little over 2 cents to $1.58 a gallon. December contracts on heating oil and gasoline expired Wednesday.

The drop in gasoline stocks worried some energy observers because it could lead to another price hike.

"We have long argued that with prices back down again, there is very little room for incentive for consumers to cut back on any more gasoline demand," Rakesh Shankar, an energy analyst with Economy.com in West Chester, Pa, wrote in a report Wednesday. "With inventory levels slipping again, and inventories nearly 5% below last year's levels, we can expect an increase in gasoline prices in the next few months."

Earlier, traders keyed on the rise in distillate inventories, which could indicate the country does not face an imminent shortage of heating oil. Unseasonably warm weather in the Northeast, which uses the bulk of the country's heating oil, has dampened energy use in recent weeks. The drawdown in gasoline didn't surprise traders because gasoline demand usually tapers off through January.

"I'm primarily playing this on the weather," said Dan Flynn, an oil broker at Alaron Trading in Chicago. "Overall, the market is pretty much what we expected. There were no surprises."

Analysts had forecast supplies of gasoline and distillates to rise by 1.6 million barrels and 1.3 million, respectively, according to Platts, a New York media company that tracks the energy industry. Crude stocks were predicted to fall by 1.7 million barrels as refineries increased their processing rates by 1.1%, Platts found.

A different survey by

Reuters

had found that analysts expected crude inventories to fall by 100,000 barrels, distillate inventories to rise by 800,000 barrels and gasoline inventories to gain 1.5 million barrels.

Oil inventories were up as more refineries come back online in the Gulf of Mexico and others increase their run rates to make up for the shortfall. Hurricanes Katrina and Rita knocked much of the area's gas and oil rigs and platforms offline and about 30% of the region's gas and 36% of oil production still remains inoperative, according to the Minerals Management Service on Wednesday, which oversees offshore oil and gas production.

Imports have also shored up some of the shortfall in domestic crude production. Last week, domestic crude production was 4.7 million barrels per day, and is likely to remain below 5 million barrels for many weeks to come, the Energy Department said in its weekly outlook on the petroleum markets. Imports have averaged 9.7 million barrels per day and would need to pick up to avoid any winter shortfalls. Otherwise, the department sees oil prices rising once again.

Warmer-than-normal weather has put a crimp in energy prices and allowed refineries to add to their stockpiles of heating fuels despite short-lived cold blasts. Storms are expected to drop more than 2 inches of rain by Thursday morning in New England and flash floods may hit states from Maine to eastern New York, AccuWeather, a State College, Pa.-based weather forecaster, said Wednesday.

For 11 straight weeks, hedge funds and other speculators have bet that oil prices will fall, according to the Commodity Futures Trading Commission, which oversees domestic commodity futures and options markets. There were a net 43,064 short positions, or bets that prices will fall, in the week ended Nov. 22. Traders have been betting energy prices will continue their fall because the Organization of the Petroleum Exporting Countries, which accounts for about 40% of the world's petroleum, cut its self-imposed production quotas and increased output on Oct. 1. The CFTC will release its next trading report on Friday.

Energy stocks were mixed, with

Chevron

(CVX) - Get Report

losing 0.1% to $57.31;

Exxon Mobil

(XOM) - Get Report

was up 0.5% to $58.06;

British Petroleum

(BP) - Get Report

lost 0.2% to $65.84;

Halliburton

(HAL) - Get Report

jumped 2% to $63.65.

Despite rising energy prices and hurricanes that closed much of the Gulf of Mexico's gas and oil production, the economy grew at 4.3% during the third quarter, the Commerce Department said Wednesday. The growth was higher than the projected 3.8% rate the agency reported last month and was chalked up to bigger investment in residential real estate and higher consumer and company spending.