Oil Edges Up Ahead of Inventory Data

The October contract gains 6 cents.
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Updated from 1:46 p.m. EDT

The oil market was choppy Tuesday as traders tried to position themselves ahead of tomorrow's inventory report, and in the end crude closed slightly higher.

On its first day of trading, the crude contract for October delivery closed up 6 cents to $65.71 a barrel on Nymex. Gasoline futures lost 1 cent to $1.85 a gallon.

Natural gas prices rose to $9.70 per thousand cubic feet, just below their all-time high of $10 reached in 2003.

Crude prices pushed higher earlier in the session as concerns over tight global supplies and shrinking spare capacity supported the bulls' case. Analysts are expecting crude demand to increase by some 1.5 million barrels a day in the fourth quarter to roughly 85.5 million barrels.

Oil had risen Monday after an oil export terminal in Iraq was reportedly shut down due to power outages. Oil production, however, was probably unaffected by the outage, analysts say.

Some technical analysts see a potential correction in oil prices in the short term. John Person at the National Futures Advisory Service, a private consulting company in Palm Beach, Fla., says that popular indicators, including the 50-day moving average, are showing a "topping pattern."

He also speculates that a bearish inventory report tomorrow could trigger a selloff that would push prices down to the upper-$50 range by mid-September.

The Energy Department is scheduled to release its weekly inventory report Wednesday, with analysts estimating another drop in gasoline stocks, by 900,000 barrels, and small gains in crude inventories.

Crude inventories in the U.S. have been growing steadily for the past year, from roughly 270 million barrels last September to more than 320 million barrels currently.

At Raymond James, analysts said in a research note that there are signs showing inventories could continue to rise this year and next, which may eventually trigger a sharp slide in oil prices.

"With global oil inventories already above average and well-above five-year averages for many parts of the world, consistent inventory builds over the next six quarters would take oil inventories to record high levels," the research firm said. "Even though the market is currently overlooking these higher than normal inventories, at some point in time it would be forced to recognize the bearish reality of these contra-seasonal inventory builds."

Jim Williams at WTRG Economics says that total petroleum stocks, which include both crude oil and finished products, are 4% higher than a year ago.

Williams also estimates that current oil prices have a fear premium of $15 to $20 built in because of the lack of global spare capacity.

"As little as three years ago the world had a spare capacity cushion of 5 million or 6 million barrels a day, which could have easily covered supply disruptions from two producers such as Venezuela and Nigeria," he says. "But what happens today, with virtually no spare capacity left, a minor supply disruption such as the one in Ecuador moves the market by more than $2."

As long as the forward curve for oil futures remains up, which means that future oil contracts are more expensive than spot prices, refiners have the incentive to continue buying oil and building inventory, Williams says.

In company news Tuesday, the construction company

Chicago Bridge & Iron

(CBI)

said it won a $100 million deal to build storage tanks for

Anadarko's

(APC) - Get Report

liquefied natural gas receiving terminal in Nova Scotia. Despite the news, shares of Chicago Bridge & Iron fell 53 cents, or 2%, to $25.94.

Meanwhile, news reports said the Indian national oil company is preparing a counterbid for

PetroKazakhstan

(PKZ)

. The Canadian oil company operating in Kazakhstan said on Monday that it agreed to be acquired by China National Petroleum Corp. for $4.18 billion.

PetroKazakhstan produces about 150,000 barrels of crude a day. Its strategic location makes it an attractive buyout target for Asia's biggest oil consumers, who are seeking to secure more supply sources.

Major oil producers' shares were mixed Tuesday.

Exxon Mobil

(XOM) - Get Report

gained 0.2%,

ConocoPhillips

(COP) - Get Report

dropped 0.6%,

BP

(BP) - Get Report

fell 0.6%, and

Chevron

(CVX) - Get Report

decreased 0.07%.