Oil prices steady at mid-$104 after surge to record high

Article posted March 06, 2008 - 12:32 PM
SINGAPORE - Oil prices steadied Thursday after rising to a trading record near $105 a barrel after a surprising drop in US crude oil supplies.

Also supporting oil prices were OPEC's decision to hold its output steady, an escalating crisis involving three oil-producing South American nations, and as the US dollar sank to another record low against the euro.

"The primary factor causing the surge in oil prices is the surprising drawdown in crude inventories, which caused traders to really react quite dramatically," said Victor Shum, an energy analyst with Purvin & Gertz in Singapore.

Most analysts had expected the US Energy Department's Energy Information Administration to report oil stocks rose last week for the eighth straight time. Instead, the stocks fell 3.1 million barrels.

In Vienna, the Organization of Petroleum Exporting Countries said Wednesday it would hold production levels steady, at least for now. OPEC ministers cited falling demand in announcing their decision to hold production steady.

The EIA report and OPEC announcement fed a new frenzy of investing in oil futures, which have risen to new inflation-adjusted records this week as the falling dollar drew investors to the market.

Light, sweet crude for April delivery slipped 12 cents to $104.40 a barrel in Asian electronic trading on the New York Mercantile Exchange by midday in Singapore.

The contract jumped $5 to settle at a record $104.52 a barrel on Wednesday and later rose to $104.95 in post-settlement electronic trading.

Earlier this week, oil prices broke the previous inflation-adjusted price record of $103.76, set in 1980 during the Iran hostage crisis.

"Five dollars is an incredible gain," Shum said. "The overall oil market fundamentals are supportive of strong oil prices but not at this level, above $100. I would expect some profit taking to put a temporary halt to this rather large surge in pricing."

Analysts noted that US oil inventories are at historic highs despite last week's decline in crude supplies. Meanwhile, demand for gasoline is falling, and several forecasters have cut their oil demand growth predictions for this year.

Other aspects of the EIA's inventory report were roughly in line with expectations. Gasoline supplies grew by 1.7 million barrels last week, more than the 900,000 barrels analysts expected, and are at record levels.

"The traders focus on the crude oil drawdown but they did not pay as much attention to the continuing build in gasoline inventories," Shum said. "Gasoline inventories are way above the five year historical average. It's an indication of a demand slowdown in the US."

On the other hand, inventories of distillates, which include heating oil and diesel fuel, fell by 2.4 million barrels, more than the expected 1.9 million barrel decline. Distillates stocks as of Feb. 29 were nearly 10 million barrels less than they were at the end of January.

Traders also worried about the escalating of tensions between oil producing countries in Latin America. Colombia's weekend attack on leftist rebels hiding in Ecuadorean territory has sparked a growing crisis as Venezuela moved tanks and soldiers to the Colombian border Wednesday. Ecuador said Monday it had sent 3,200 soldiers to its border with Colombia.

In other Nymex trading, heating oil futures fell 0.39 cent to $2.9392 a gallon (3.8 liters) while gasoline prices were a tad lower at $2.642 a gallon. Natural gas futures added 5.5 cents to $9.796 per 1,000 cubic feet.

In London, Brent crude fell 22 cents to $101.42 a barrel on the ICE Futures exchange. - AP