Oil Spikes on U.S. Plan to Double Strategic Reserves

Oil extended today's rally after the White House said President Bush will seek a doubling of the Strategic Petroleum Reserve to 1.5 billion barrels in tonight's State of the Union address. Energy Secretary Sam Bodman said the government will start buying oil for the reserve in about two months.

Bodman told reporters, "At current market prices we believe that we can purchase about 11 million barrels of oil over the course of a few months, so that would be approximately 100,000 barrels per day."

Light sweet crude jumped more than 3% on the news and settled at $55.04. Earlier in the day, oil moved up as cold weather in top consumer the United States raised demand for heating fuel.

The U.S. cold snap that started last week may have come too late to lift the bearish mood of some investors. But weekly U.S. stocks data, due for publication on Wednesday, is expected to
show a drop in distillate inventories, including heating oil.

"It would have to be a big drop to surprise the market. The market is pretty well supplied for winter," said Tobin Gorey, analyst at Australia's Commonwealth Bank.

A warm start to the U.S. winter and a shift in investment flows have wiped 10% off the price since the start of 2007. U.S. oil sank last week to a low of $49.90 after trading activity across commodity markets reached record levels.

On crude markets, the rise in open interest -- or the number of contracts that have not been closed -- has been driven by a combination of speculative short positions and new long positions, analysts said.

The latest regulatory data on the New York Mercantile Exchange showed a big drop in the number of short positions, suggesting that at least for now, the sell-off is stalling.

"While the downward momentum has not fully reversed yet, it has significantly weakened over the last five trading days," said Olivier Jakob of Petromatrix.

Ministers from the Organization of the Petroleum Exporting Countries believe the market will stabilize once the full effect of the group's 1.7 million barrels per day output reduction is felt. Oil has fallen 32% from its $78.40 record in July.

OPEC President Mohammed al-Hamli said a reasonable price for OPEC's crude basket is $55 a barrel -- at least $5 higher than the current level for the reference price, which is valued at a
$5-$6 discount to U.S. crude.

"We are not panicking...concerned, I think, because we are embarking on huge investment programs and the price in that respect is very important because of the outlays," he said.

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