Oil, Gas Bounce Back

Bargain hunters emerge but progress in talks with Iran limit the gains.
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Updated from 10:54 a.m. EDT

Oil futures jumped past $61 Thursday as bargain-hunting traders snapped up contracts. Large supply levels and a break in talks with Iran tempered prices.

Light, sweet crude rose 85 cents to $61.59 a barrel on Nymex. The rest of the energy sector perked up, with heating oil adding 3 cents to $1.67 a gallon and gasoline adding 1 cent to $1.49 a gallon.

On Wednesday, crude slid to a fresh six-month low of $60.46 a barrel on high levels of winter heating fuel in storage. The U.S. Energy Department reported distillates, which include heating oil, surged by 4.1 million barrels last week, double analysts' projections. Refiners are ramping up output of the fuel ahead of the winter heating season.

A break in talks with Iran over its nuclear program also held oil prices in check. Oil has soared and dropped on every break or delay in talks with Iran, the world's fourth-largest crude producer, to halt its nuclear program. In defiance of Western threats of sanctions and military action, Tehran resumed nuclear development in February, ostensibly to produce more power. The West, however, believes Iran wants to build atomic weapons.

European diplomats set a new deadline for Iran to halt its nuclear program to allow negotiators more time. Tehran now has until the first week of October to suspend uranium enrichment, though Italian Prime Minister Romano Prodi said European and Iranian diplomats disagreed over how it would be done.

"Ahmadinejad insisted on Iran's right to go ahead in research in the nuclear field, and I insisted on the need for a complete halt in the military aspect of the research," Prodi said in a statement,

Reuters

reported.

On Thursday, Iranian President Mahmoud Ahmadinejad said Iran would be willing to discuss cutting uranium enrichment "under the right conditions," though he did not elaborate on what they might be,

Dow Jones

reported.

Natural gas rose 3 cents to end trading at a two-and-a-half-year low of $4.78 per million British thermal units on mild fall temperatures, strong inventory levels and the lack of hurricanes in the Gulf of Mexico, where much of the country's natural gas and oil output is located.

Inventories jumped by 93 billion cubic feet to 3.17 trillion cubic feet last week, according to the U.S. Energy Department's weekly supply report released this morning. They now are 13% over last year and the five-year average.

The blowup of Amaranth Advisors, a Greenwich, Conn.-based hedge fund, this week has also contributed to lower prices. On Monday, the fund said in an investors' letter that it had lost $5 billion on bad natural gas bets. Its holdings are down 65% this month and 55% for the year,

The New York Times

reported.

Prices may slump even further this year if weather forecasters are right. Last week, the National Weather Service predicted that El Nino conditions could bring a warm, wet winter to the U.S. Thus far, natural gas prices are off around $10 since their high this winter.

Meanwhile, in stock market action, energy shares were rising as much as 2% on the Amex Oil and Philadelphia Oil Service Index. Leading advances were

Occidental Petroleum

(OXY) - Get Report

,

Valero Energy

(VLO) - Get Report

and

Chevron

(CVX) - Get Report

.

Exxon Mobil

(XOM) - Get Report

, the largest publicly traded energy company, was climbing 1.1% to $64.83.

Despite sluggish natural gas prices, stocks of companies that produce and transport the fuel were up by 1% on the Amex Natural Gas Index.

Southwestern Energy

(SWN) - Get Report

,

EOG Resources

(EOG) - Get Report

and the

Williams Cos.

(WMB) - Get Report

were leading increases, up around 2% each.