Oil Prices Resume Their Climb

After posting its first down day in a week, July crude jumps.
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Updated from 2:34 p.m. EDT

Oil prices shot higher again Friday, crossing $55 a barrel, on concerns that growing demand for diesel and jet fuel is outpacing refineries' production capacity.

News off a shutdown at a St. Croix refinery that produces 100,000 barrels a day also contributed to surging oil prices.

The July crude contract closed up $1.40 to $55.03 a barrel on Nymex.

Gasoline futures also climbed 4 cents to $1.55 a gallon, while heating oil, now in the spotlight after the government reported a "surprising" drop in high-sulfur distillate fuel, surged 6 cents, or 4%, to $1.60 a gallon.

The Energy Department said Thursday that U.S. crude stocks grew by 1.4 million barrels last week, while distillate stocks rose by 700,000 barrels and gasoline inventories rose by 1.3 million.

Oil futures vaulted 5% Wednesday on concerns about potentially insufficient supplies of distillate fuels. Those concerns were arguably validated Thursday when the inventory report said distillate production was "relatively flat" last week, while demand for jet fuel and heating oil was more that 5% higher than it was this time last year.

"The market moved up this week because of short covering," said Lee Fader futures trader at ABN Amro. "There was some good fund buying around $50 a barrel, but it mostly fed on itself."

According to Fader, a rumor circulated Wednesday that a large airline was buying a lot of jet fuel, which "spooked the market." He said crude prices had a 62% correction, measured from April's peak to the lowest recent closing price, but estimated they are still at the upper end of a trading range.

This time of year usually marks a peak in demand for gasoline. Oddly enough, however, proportional demand for distillates has increased more than the demand for gasoline recently.

Analysts are also concerned that refineries, now operating at 96.2% capacity and mainly producing gasoline, won't be able to meet the surge in distillate demand.

Among companies,

Schlumberger

(SLB) - Get Report

was raised to buy from hold by Citigroup analyst Geoff Kieburtz. He said the company has the best exposure to spending by exploration and production companies in the oilfield services sector. Kieburtz also said the company's "lackluster margin performance in 2004 reversed itself in the first quarter of 2005 and...is poised for further improvement." Shares rose $1.20, or 1.72%, to $71.11.

Elswhere,

Harvest Natural Resources

(HNR)

said it had to withdraw its earnings guidance for 2005. The company's Venezuelan affiliate, Harvest Vinccler C.A., had it drilling program suspension extended because of yet-to-be-decided fee reductions and tax increases proposed by the Venezuelan government. Harvest Natural said it believes HVCA "has met its tax obligations in all material respects." Shares fell $1, or 10.89%, to $8.18.

Raymond James said in a note that that under an operating service agreement, Harvest was scheduled to receive between $50 to $60 million in fees from PdVSA, the state-owned oil company, for its first-quarter production but that the payment has been delayed. It is unclear when and how much will actually be paid.

In April, Venezuelan officials delivered more bad news to foreign oil producers, saying PdVSA plans to limit the fees paid for oil deliveries under the operating service agreements to a maximum of two-thirds of the market value of the delivered oil. This adds to a previous decision to raise the income tax to 50% from 34%.

Shares of the major oil producers were mostly down in late Friday trading.

Exxon Mobil

(XOM) - Get Report

fell 0.42%;

Chevron

(CVX) - Get Report

lost 0.07%;

ConocoPhillips

(COP) - Get Report

gained 0.15%;

Royal Dutch/Shell

(RD)

fell 0.77%; and

BP

(BP) - Get Report

dropped 0.47%.