Skip to main content

Updated from 1:11 p.m. ET

Despite assurances that additional oil supplies are on the way, the price of crude oil rose again on Wednesday as new reports showed an unexpectedly large decline in domestic inventory levels last week.

Industry and government data released late Tuesday and on Wednesday, respectively, showed a significant drop in gasoline inventories, a smaller draw in crude oil inventories and a moderate build-up in distillate inventories last week.

The unexpected drop in oil inventories sent oil prices back up again on Wednesday, despite the 500,000 barrel-a-day production increase enacted by

Organization of Petroleum Exporting Countries


Prices continued to move higher throughout the afternoon on news of renewed tensions in the Mideast. There were reports that Israeli reserve troops had been activated in the West Bank and that Prime Minister Ehud Barak's has warned Palestinians to end the violence or face a strong response. More than 150 have died in five weeks of Israeli-Palestinian fighting, which some fear may spill over into nearby oil-producing nations.

In addition, there were indications Wednesday that Iraq -- which already threatened to cut oil exports last week -- might open an oil supply route outside of its United Nations oil-for-food agreement.

The benchmark futures contract for December delivery of crude oil settled up 55 cents, at $33.25 a barrel, on the

New York Mercantile Exchange

. The price had climbed as high as $33.74 earlier, coming just short of last week's highs, before slipping back late in the day.

The increase last week in oil distillate stocks, which include diesel fuel and heating oil, may help ease concerns of price spikes spurred by supply shortages this season. Still, even with last week's unexpectedly large build-up, inventories remain 18.5% below last year's levels, according to the

American Petroleum Institute

, an industry group.

In its weekly report, released late Tuesday, the API reported an increase of 1.73 million barrels in distillate stock levels last week, much higher than expected. The market consensus had ranged from a draw of 1.1 million barrels, to an increase of 200,000 barrels, according to

Jefferies & Co.

Scroll to Continue

TheStreet Recommends

On Wednesday, the

Energy Information Administration

, a division of the

Department of Energy

, reported a similar build-up of 1.4 million barrels. The market often looks to the EIA survey for confirmation of the petroleum institute's estimates, as the government analysis is more comprehensive.

In recent weeks, the industry group and the government agency have occasionally shown wide divergences in their reports. But last week's reported levels closely matched each other, with both reports showing an unexpected draw in crude oil stocks.

The API estimated crude oil inventories fell by 749,000 barrels, while the EIA reported a 1.5 million barrel draw.

Tyler Dann, analyst at

Banc of America Securities

, noted that the drop in crude oil stock levels was completely the opposite of the consensus forecast of a 2.3 million-barrel build-up, and even further from the typical seasonal build-up of 6.3 million barrels. Just a few weeks before the winter season begins, crude oil inventories are more than 11% lower than normal seasonal levels.

Banc of America analysts remain skeptical that OPEC will actually increase its output by the full half-million barrels a day, as called for under its price band mechanism, because of the organization's limited excess capacity -- the lowest in three decades, excluding periods of disruption, according to the EIA.

OPEC, whose members account for an estimated 41% share of the oil market's production, agreed to the

increase on Monday. The decision was in accordance with an informal agreement made among members earlier this year to increase production if the price of its "basket" (made up of seven oil blends from Algeria, Indonesia, Venezuela, and other countries) remained above $28 a barrel for 20 consecutive working days, as it had by last Friday.

Most industry and government analysts agree that Saudi Arabia and the United Arab Emirates are the only OPEC members with any significant excess capacity at this time. Saudi Arabia, the world's largest oil exporter, has indicated on a number of occasions that it was able and willing to increase production to help push down prices.

But the EIA estimates that Saudi Arabia was already producing at least 500,000 barrels a day above the quota increase that went effect on Oct. 1, which makes it more difficult to predict whether the latest increase will validate oil that is already being produced or result in further increases above the cartel's official quota. One analyst said the increase under the price band mechanism "simply gives them a new level from which to cheat."

Klaus Rehaag, a director at the

International Energy Agency

in Paris, said the perception that OPEC (in particular, Saudi Arabia) was probably producing above the previous target is already widespread in the market.

"If that's the perception, then the additional barrels would have been factored into the price already," he added. "The market is really tight and prices are stubbornly high despite crude oil going into the market."

But Tim Evans, senior energy analyst at


, played down the drop in crude oil inventories, saying that they will bounce back as oil supplies begin to reach the U.S. He expects oil supplies from OPEC to increase, and that additional oil, combined with the remaining oil slated for delivery from the

Strategic Petroleum Reserve

, will increase inventories and decrease prices this year.

President Clinton authorized the

release of oil from the Strategic Petroleum Reserves in late September in an effort to rein in rapidly rising heating fuel costs. The government began distributing the oil in mid-October, awarding the final contracts last week for the 30 million barrels ordered released. As of Tuesday, 5.57 million barrels of the oil released from the reserves had been delivered to various refineries around the nation.

Meanwhile, the drop in gasoline stocks was much larger than anticipated, with the government reporting a 4.1 million barrel drop last week while the API estimated the draw on gasoline inventories was even larger, at 4.9 million barrels. Despite the sharp drop in gasoline stock levels, analysts say the declines are in-line with last year's seasonal pattern with inventories about eight million barrels lower than they were a year ago.

The December contract for unleaded gasoline was up about .8 cents at 88.43 cents, after jumping as high as 89.7 cents earlier in the session. The December contract for heating oil ended the day up a half-cent at 94.09 cents.