Updated from 11:44 a.m. ESTCrude prices surged to a seven-week high Tuesday as traders focused on falling gasoline supplies and political tensions in Nigeria and Iran. Light, sweet crude soared $1.91 to close at $66.07 a barrel on the Nymex. Oil, which is now up 5% on the year, last cleared $66 a barrel on Feb. 6, when it settled at $66.10. "The reason, obviously, was gasoline and geopolitical unrest," said Abe Glass, president of Glass Futures Corp. in White Plains, N.Y. The spike in crude prices came a day before the Energy Department's weekly report on fuel inventories. Gasoline stockpiles are projected to fall by 1.5 million barrels to 220.1 million barrels, according to a Bloomberg survey of analysts. It would be the fourth week in a row gasoline supplies declined. Gasoline stockpiles likely fell because of ongoing refinery maintenance. Refiners, which process crude into gasoline and other petroleum products, have closed some units as they retool to make cleaner, summer-blended gasoline and switch over to a fuel that can be blended with ethanol. By May 31, refiners must stop blending gasoline with MTBE, or methyl tertiary butyl ether, an additive linked to water pollution. Unleaded gasoline prices have skyrocketed 14% over the past month as the deadline for the switch from MTBE to ethanol draws near. Traders are also worried inventories won't be enough to meet peak demand during the summer driving season. They bid up gasoline 5 cents to $1.88 a gallon. There is 1% more gasoline in U.S. storage now than at this time last year. As refiners undergo maintenance, crude builds up. Domestic supplies now stand 9% above last year, and are expected to climb even higher in the Energy Department's report. Analysts were calling for a 1.4 million barrel-rise for the week ended March 24.
Still, traders are a little wary of betting on the crude supply numbers after getting burned last week. They expected a 2.4 million barrel increase for the week ended March 17, but got blindsided with a drop of 1.3 million barrels. Why the decline? Falling imports and higher processing rates at refiners helped draw down bulging stocks. Crude imports have been lower in the past few weeks because domestic supplies are at record highs, and warm temperatures have shaved demand for distillates, which include heating oil. If imports remain low, refiners will be forced to draw on their supplies. "Lower crude imports would be bullish," wrote Bill O'Grady, assistant director of market analysis at AG Edwards, in a note to clients. Estimates for the inventory figures played out against a backdrop of geopolitical tensions. In Nigeria, rebels released one British and two American oil workers, their last remaining hostages, on Monday, and promised not to carry out any more abductions. Militants have kidnapped oil workers and blown up oil installations in a bid to gain a share of the country's oil wealth. Their campaign of violence has slashed Nigerian crude output 26% to 1.6 million barrels per day. Following the hostage release, Nigeria's president called for a meeting next week between the government and militants to resolve the continuing supply problems. Shell ( RDS.A) took no comfort in the hostage release and refused to restart operations in Africa's largest oil producer until it could guarantee its employees' safety. The supermajor has 455,000 barrels of crude offline due to the attacks. In Iran, a standoff over nuclear research continued to keep traders on edge. The U.N. Security Council has been discussing what strategy to take with Tehran, and is expected to release a statement sometime this week. On Thursday, foreign ministers from Russia, China, France, Britain, Germany and the U.S. are set to meet to discuss ways to break the deadlock. Iran restarted small-scale uranium enrichment to generate more electricity for its growing population. The West, though, suspects the move is a ruse to build atomic bombs.
A projected drop in distillate supplies sent heating oil rising 4 cents in trading Tuesday to a close of $1.82 a gallon. Distillates, which include heating oil, are projected to dip 1.3 million barrels from 126.7 million barrels. Still, distillates remain 15% above a year ago. Despite warmer weather in the Northeast, the country's largest user of heating fuels, natural gas rose 14 cents to $7.21 per million British thermal units. There is currently 39% more natural gas in storage than last year thanks to one of the warmest winters on record, according to the National Weather Service. Distillates include heating oil. Energy shares were mixed despite skyrocketing energy prices. The supermajors ended the day with losses, with Exxon Mobil ( XOM) falling 29 cents to $61; BP ( BP)dipping 57 cents to $68.96, and Chevron ( CVX)declining 32 cents to $57.89. The stocks of oil-service companies and independent drillers, though, rose. ConocoPhillips ( COP) jumped 86 cents to $63.96; Diamond Offshore Drilling ( DO) leapt $5.06 to $87.34, and Baker Hughes ( BHI) soared $1.54 to $68.48.