Updated from 11:06 a.m. EDT
Oil futures cleared $72 a barrel Wednesday as rising gasoline inventories weren't enough to assuage fears of summer shortages.
Light, sweet crude closed up $1.44 to $72.13 a barrel on Nymex. Unleaded gasoline added 12 cents to a one-week high of $2.16 a gallon. The gain occurred despite a report that showed U.S. supplies of the fuel rose for a second straight week.
Traders focused instead on inventories levels that, less than a month before summer begins, are still almost 5% below their levels at this time last year.
The U.S. Energy Department's weekly supply report showed that gasoline inventories climbed by 2.4 million barrels to 205.1 million barrels last week, more than double analysts' predictions. A recovery in refinery operations and record imports were behind the increase.
"Gasoline inventories are still below year-ago rates, and refinery utilization needs to pick up further for us to be out of the woods. But we are moving in the right direction," said Rakesh Shankar, an energy analyst at Economy.com in West Chester, Pa.
Many refiners have been operating at lower volume as they switch over to cleaner blends of gasoline for the summer driving season and phased in ethanol. Refiners ran at 90.2% of their capacity last week, an increase of more than 1 percentage point from a week earlier.
Gasoline prices have jumped 20% since January on concerns there won't be enough reformulated gasoline to meet demand, particularly if supplies are disrupted. On Tuesday, the Energy Department increased the average for retail gasoline this summer to $2.71 a gallon, 9 cents higher than last month's forecast and 34 cents higher than last year.
As refiners increased their run rates, crude stockpiles jumped 300,000 barrels to 347 million barrels thanks to an increase in imports. The gain came even though production of both distillates and gasoline rose. Crude is refined into gasoline.
Inventories of crude are now at an eight-year high, more than enough to cover any short-term disruptions. At the moment, there is 5% more oil in storage than the five-year average.
Distillates, which include heating oil and jet fuel, inched up 200,000 barrels to 114.7 million barrels.
Heating oil settled at $2.06 a gallon, up 7 cents. Natural gas, also used to generate heat, added 32 cents to $6.90 per million British thermal units. Analysts surveyed by
expect inventories to climb 79 million cubic feet from 1.9 trillion cubic feet in the Energy Department's report tomorrow. Already, natural gas is 31% above a year ago.
Oil prices have surged 16% this year on real and perceived threats to worldwide oil supplies. A standoff with Iran over its nuclear program and production cuts in Nigeria, where output is down by a quarter or 500,000 barrels a day, has underpinned oil futures. Other problems in small oil-producing countries, like Chad, where the president threatened to cut off oil production if the World Bank didn't unfreeze oil royalties.
Prices for oil futures fell earlier this week on news Iran's president sent a letter to his U.S. counterpart proposing solutions to the standoff. But prices quickly rebounded on Tuesday after the U.S. rejected the letter and said it held nothing new.
On Wednesday, President Bush said the letter "did not answer the main question that the world is asking, and that is, 'When will you get rid of your nuclear program?'"
The U.S. will continue to call for economic sanctions against Iran, but will give Tehran two extra weeks to reconsider its position. European representatives will work in the coming days on a package of incentives for the Iranians if they wish to put together nuclear power for civilian use.
Traders have followed every step in negotiations with Iran because the country is the second-largest crude producer in OPEC after Saudi Arabia. If any of its production was cut, crude prices would rise even higher.
Even though producers pump enough oil to meet world demand, there is little spare capacity to cover any disruptions. The world consumes around 85 million barrels of crude per day, but there are only 2 million barrels of spare capacity, all from Saudi Arabia.
"While inventories seem to be adequate, it will be geopolitical developments, mainly the U.S. and Iran dispute, that will drive prices in the near term," said Bart Melek, senior economist at BMO Nesbitt Burns in Toronto. "Since we don't expect a quick solution to the problems between the West and Iran and very healthy demand growth, we see crude oil trading near record levels in the near-term."
The rally in oil prices lead energy stocks higher, with the Philadelphia Oil Service Index and Amex Oil Index up 1%. Among the largest declines, were
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