Update: Crude Oil Settles at $31.46 - TheStreet

Updated from 1:23 p.m. EDT

While the

decision last week to release oil from the nation's reserves provided temporary price relief, crude oil prices threatened to climb higher again Wednesday after new data showed unexpectedly large draws on domestic inventories.

News of recent draws in both crude oil and distillate stocks, which include heating oil and diesel fuel, prompted a jump in the price of both contracts on the

New York Mercantile Exchange

Wednesday. The contract for November delivery of crude oil climbed as high as $32.23 before easing back to settle at $31.46, down just 4 cents from Tuesday's close.

The November contract for heating oil settled up 1.74 cents at 95.05 cents per gallon.

The drop in both crude oil inventories and distillate stocks came as a surprise to analysts who had expected a slight increase in both. Only gasoline inventories rose, surpassing analysts' expectations and prompting a slight easing in market prices.

The contract for November delivery of unleaded gasoline ended the day down .48 cents at 89.31 cents per gallon. Analysts say that is likely in part because gasoline inventories grew last week more than anticipated: by 2.9 million barrels, according to the industry group, the

American Petroleum Institute

, or 3 million barrels, according to

Department of Energy

estimates.

Meanwhile, the API reported late Tuesday that U.S. crude oil stocks fell about 2.24 million barrels to 284.34 million barrels last week.

The Department of Energy on Wednesday reported a smaller decrease, estimating that crude oil stocks fell by a half-million barrels to 285.6 million barrels. But even at 285.6 million barrels, crude oil inventories remain about 7.5% below the average level of the past five years, according to analysts.

Even more unexpected was the drop last week in distillate stocks, estimated at nearly a million barrels. That's in sharp contrast to the consensus forecast for a 1.9 million barrel increase.

After building up over the past few weeks, distillate stocks fell last week by about 761,000 barrels to 116.2 million barrels, according to the API report. The government reported a million-barrel draw, with distillate stocks falling to 114.9 million barrels. That brings the total inventory roughly 20 million barrels short of the recent average, according to

Banc of America Securities

estimates.

Tim Evans, senior energy analyst at

IFR-Pegasus

, blamed the shortfall in part on a reluctance among refiners to restock their physical holdings at a time when many units are scheduled for maintenance. Many refineries have planned maintenance work on their facilities over the next two months.

"Whatever the explanation, the bullish news will test the market's faith in its belief that higher

OPEC

(Organization of Petroleum Exporting Countries) shipments and the pending SPR (strategic petroleum reserves) release will arrive in a timely fashion," said Evans.

Taken alone, heating oil stocks are 30% lower than the average level over the past five years. That is particularly disconcerting, as analysts now don't expect the additional 30 million barrels of oil, slated to be released from the nation's reserves over the next week-and-a-half, to be distilled into heating oil before the end of next month -- if at all. With refineries running near capacity, some are skeptical that the release of additional crude oil will provide much, if any, relief to those who depend on heating oil in the winter.

Thorsten Fischer, an economist at

Economy.com

, points out that inventories remain at historic lows and well below last year's levels. In the Northeast, where two-thirds of the nation's heating oil is consumed, he said the heating oil inventory level is 65% lower than it was a year ago.

Helping consumers afford to heat their homes this winter was a primary reason given for the administration's decision to release the 30 million barrels of oil, or about 5%, of the nation's Strategic Petroleum Reserve -- an action not taken since the Persian Gulf War.

The announcement late last week helped push prices down from the 10-year high of $37.80 reached a week ago, but few see it as more than a short-term solution. Analysts say the fundamental problems that sent prices sky high in the first place remain unresolved.

William Randol, an oil analyst at Banc of America Securities, said three mid-term issues remain, including: tight oil inventories worldwide, limited excess capacity among OPEC members, and continually strong world demand. Over the next year-and-a-half, Randol said, the release of oil from the reserves "will prove impotent in addressing these three issues."

OPEC announced two weeks ago that it would raise its output target to 26.2 million barrels a day beginning Oct.1. But analysts and industry groups estimate that the actual increase is likely to result in a net daily increase of 100,000 to 300,000 additional barrels -- far short of OPEC's goal of 800,000 additional barrels a day -- since many OPEC members are already producing at or above capacity.