Crude Bounces Back Above $58 a Barrel

Morgan Stanley raises its price target on the commodity.
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Updated from 2:08 p.m. EST

Oil bounced back above $58 a barrel Thursday as expectations grew that OPEC will cut output to boost prices.

Light, sweet crude for March delivery rose $1.15, or about 2%, to $58.80 after Venezuela's energy minister, Rafael Ramirez, urged the Organization of the Petroleum Exporting Countries to slash production by between 500,000 and 1 million barrels per day at its March meeting. OPEC controls 40% of the world's crude.

Traders also bid up the contract after Boone Pickens, the chairman of Dallas hedge fund BP Capital, said crude could hit $90 to $100 a barrel in the next two years. Pickens accurately predicted that oil would touch $60 a barrel in 2004.

Morgan Stanley also increased its estimate for crude to an average of $57.50 a barrel, up 15% from its previous forecast, because of rising demand. Global demand is projected to increase 2.1% this year, double the rate in 2005, Morgan argued in a research note. Prices will probably be $55 a barrel in 2007 and $50 in 2008.

Estimating supply and demand is as difficult as any effort to predict the future. Forecasts differ for any number of reasons, including supply disruptions, the growth rates of world economies, and consumer reactions to high oil prices.

The Organization of the Petroleum Exporting Countries, which controls over a third of the world's oil, said in its monthly forecast on Wednesday that global demand will slip to 28.5 million barrels per day, a decrease of 200,000 barrels from the group's January forecast.

OPEC estimates that demand will fall from 30.2 million barrels per day this quarter, to 27.6 million barrels in the second quarter. A drop in demand at a time of rising oil supplies could cause a glut and lower prices, a prospect the group would like to avoid. OPEC meets March 8 to discuss whether to continue pumping at record levels or to trim output.

Crude lost nearly $2 on Wednesday due to a stunning 4.9 million-barrel rise in inventories to 325.6 million barrels last week. The amount of crude in storage is now 10.9% above a year ago. After the sell-off, some traders are probably in the market to cover short positions. Short-traders sell contracts when they are high and hope to buy them back when they are low.

Energy indices and companies recovered after a big sell-off on Wednesday spurred by a large build in crude supplies. The

Philadelphia Oil Service Index

gained 2.6%, while the

Amex Oil Index

picked up 2.1% and the

Amex Natural Gas Index

jumped 2.5%.

Large advancers included refining giant

Valero

(VLO) - Get Report

, which picked up $3.11, or 6.2%, to $53.68, and

Baker Hughes

(BHI)

, an oil services company, whose share soared $2.87, or 4.3%, to $69.04 on high quarterly earnings. Baker Hughes' net income rose 43.6% to $257.9 million, or 76 cents a share, while revenue climbed 19% to $1.9 billion thanks to strong drilling demand and production recovery in the Gulf of Mexico.

Halliburton

(HAL) - Get Report

hiked its quarterly divided 20% to 15 cents and approved a two-for-one stock split, subject to shareholder approval, that would double its shares outstanding to 2 billion. The company's board has also authorized a $1 billion share buyback program. Shares of Halliburton increased $2.65, or 3.9%, to $71.26.

Natural gas closed up 7 cents, or 1%, at $7.13 per million British thermal units after the Energy Department reported inventory data in line with analysts' predictions. Natural gas in storage fell 102 billion cubic feet last week to 2.2 trillion cubic feet and is now 24% above the same period last year and 44% above the five-year average.

Platts

had called for a withdrawal of 113 billion cubic feet, while

Bloomberg

predicted a 111 billion-cubic-foot drawdown.

Predictions of cold weather this weekend in the Northeast, the country's largest consumer of heating oil, also helped push up prices Thursday. Natural gas is used to produce electricity and heat. Temperatures will likely fall 20F degrees to the high 20s and low 30s on Saturday, according to AccuWeather.com, a State College, Pa. weather forecaster.

"We're going to have record natural gas stocks even with the extremely cold weather that's starting," said Corny Boersma, a risk manager with FC Stone in Minneapolis, Minn.

A surge in supplies has helped keep prices low, with heating oil inching up 2 cents, or 1%, to $1.62 a gallon after recovering from a six-month closing low on Wednesday. Unleaded gasoline, which settled near a one-year low on Wednesday, rose 3 cents, or 2%, to $1.41 a gallon. Surging imports have made up for the drop in gulf production and helped keep stockpiles high.

Gasoline inventories are up 1.8% from a year ago and distillates, which include heating oil, are 14.3% higher. Ample supplies and low crack spreads, or profit margins on refined fuels, may convince refiners to curtail production. Refiners will make $1.74, the lowest level since September 1994, to process three barrels of crude into two of gasoline and one of heating oil.

Many refiners have opted to undergo seasonal maintenance, which they delayed last fall after a pair of hurricanes shut down much of the Gulf of Mexico's platforms, refineries, rigs and pipelines. Refiners typically close to repair and upgrade their facilities in advance of the peak summer driving season.

"I think the next few weeks will be a dark age for refiners," said Tom Kloza, oil analyst and publisher of the Oil Price Information Service in Wall, N.J.