Crude Pushes Toward $64 a Barrel

Bulls retain control despite a big rise in crude inventories.
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Updated from 1:54 p.m. EST

Oil futures again pushed toward $64 a barrel Wednesday despite an Energy Department's report showing ample fuel supplies for the winter heating season.

February crude picked up 57 cents to close at $63.94 a barrel, regaining ground lost after traders cashed in their bets from last week's spike in prices. Oil is 40% higher than a year ago, but still 8% below its record high of $70.85 on Aug. 30, when Hurricane Katrina shut down the Gulf Coast's petroleum production.

Inventories of oil fell by 2.9 million barrels to 318.7 million barrels last week, the Energy Department said, confounding analysts whose prediction had ranged from a decline of 3 million barrels to a 1 million-barrel increase. Observers can be forgiven for their widely divergent estimates: forecasting import data can be tricky because information on oil shipments is closely guarded.

Despite a drop in inventories, levels are 11.4% above the same period last year thanks to a steady increase in refinery production. Last week, refineries used 89.8% of their capacity, the same level from the previous week, and processed 19,000 more barrels per day. On a four-week basis, refinery inputs are 1.8% below last year.

Iran's move to resume nuclear research after two years of voluntary suspension also fueled the rise in oil prices Wednesday. The U.S. condemned Iran's move and suggested the United Nations might impose sanctions. Germany plans to meet with British and French officials in Berlin on Thursday to discuss their actions.

Crude prices are tied to geopolitical events more than other commodities. Should the UN impose sanctions, countries would have to stop purchasing Iranian crude and prices would rise, restricting already tight supplies.

Natural gas fell 14 cents to $9.20 per million British thermal units, hitting lows not seen since a pair of hurricanes devastated the Gulf of Mexico's refineries, pipelines and platforms. Futures of natural gas declined during the day as traders bought back contracts to cover their short positions, or bets that prices will fall. Futures on natural gas are down 15% this year and 40% below their record high of $15.78 last month due to projections of warm weather. Natural gas rises and falls on weather predictions because the fuel is used to generate electricity and heat.

Unleaded gasoline dipped less than a penny to $1.73 a gallon, and heating oil fell 1 cent to $1.72 a gallon. Gasoline stocks in commercial storage rose 4.5 million barrels, topping estimates of a 1.8 million-barrel increase. Demand rose 1% despite high prices

"This report marks a healthy start to the gasoline build-up for the summer driving season," said Rakesh Shankar, an energy analyst at Economy.com in West Chester, Pa. "A few more weeks of this kind of healthy build will help further assure the market that gasoline prices this summer will head south."

Robust supplies will also help mitigate expected price increases as refineries start phasing in new fuel specifications from the U.S. Environmental Protection Agency that cut sulfur and MTBE, or methyl tertiary butyl ether, content Jan. 1. MTBE is suspected of polluting water supplies across the country. Lower sulfur requirements in diesel will also start in June.

Inventories of distillates, which include home heating oil, jet fuel and diesel, jumped 4.9 million barrels, as heating demand remained sluggish. Analysts had called for a rise of 2.2 million barrels. Warm weather, the New Year's holiday and rising imports -- the four-week average for imports rose 7.3% -- were cited as raising energy supplies last week. The Northeast, the largest heating oil market in the world, has enjoyed moderate weather since the middle of December and should expect more of the same through January, the National Weather Service said in its six-to-10 day forecast.

Although traders are starting to assume winter is over, prices could quickly reverse on a spate of cold weather. The winter heating season typically runs from November through March.

"We still feel that it makes sense to hedge a few weeks forward as we see dips here," said Peter Beutel, president of Cameron Hanover, an energy risk management company in New Canaan, Conn. "We have plenty of winter left, and almost anything unexpected that happens is likely to be bullish. If prices fall, we can replace hedged material with cheaper material moving forward."

The market has been eying energy inventories closely since hurricanes Katrina and Rita shut down much of the Gulf of Mexico's petroleum production and demand remained high. Companies have struggled to bring their output back online and 27% of the region's oil production and 19% of gas output is not in operation, according to the U.S. Minerals Management Service, which oversees offshore crude and gas leases.

Hurricane destruction is being cited as a major factor in reduced production for

BP

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and lower expected earnings at

DuPont

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Wednesday. Shares of BP fell 0.3% to $67.97 after the supermajor said fourth-quarter production would be lower than the same period last year due to the storms. In the three months ended Dec. 31, output is expected at 4.010 million barrels per day versus 3.824 million barrels of day in the third quarter and 4.095 million barrels during the fourth quarter of 2004.

DuPont said its fourth-quarter earnings will be lower than expected because of production disruptions and hurricane damage in the Gulf of Mexico. The chemical maker's shares were recently dipping 3.3% to $41.13 on news of the revised guidance. DuPont expects to earn 10 cents per share for the fourth quarter, compared to its previously announced guidance of 20 cents to 25 cents per share.