GO
Loading...

Oil Surges, Closes at Record High on US Supply Drop

AP
Wednesday, 5 Mar 2008 | 3:12 PM ET

Oil surged Wednesday, rising a remarkable $5 a barrel to a new record over $104 after the government reported a surprise drop in crude oil stockpiles and OPEC held production levels steady.

Oil Pipeline
Oil Pipeline

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

In Vienna, meanwhile, the Organization of Petroleum Exporting Countries said it would hold production levels steady, at least for now.

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 new investors to the market.

Light, sweet crude for April delivery jumped $5 to settle at a record $104.52 a barrel on the New York Mercantile Exchange after earlier rising to $104.64, a new trading record. Earlier this week, oil prices broke the previous inflation-adjusted price record of $103.76, set in 1980 during the Iran hostage crisis.

Brent crude also rose in London.

South American Tension Rises
Discussing the crisis at Colombia's border, with CNBC's Michelle Caruso-Cabrera.

Crude futures offer a hedge against a falling dollar, and oil futures bought and sold in dollars are more attractive to foreign investors when the dollar is falling.

At the pump, meanwhile, gas prices rose a cent to a national average of $3.178 a gallon, according to AAA and the Oil Price Information Service. Gas prices have been following oil's recent rally, and are 69 cents higher than a year ago. Many analysts expect prices to rise to near $4 a gallon this spring and summer as driving demand picks up.

While investors chose Wednesday to focus on last week's decline in oil supplies, analysts noted that oil inventories are at historic highs. Meanwhile, demand for gasoline is falling, and several forecasters have cut their oil demand growth predictions for this year.

"There are some very disturbing things in this report on the demand side," said Andrew Lebow, senior vice president at MF Global in New York.

That suggests oil's sharp jump Wednesday was also partly driven by the dollar, which fell to a new low against the euro.

"There's an ongoing stampede to be a part of the crude oil rally," said Tim Evans, an analyst at Citigroup in New York.

OPEC Holds on Output
OPEC decided to keep oil output unchanged Wednesday, with the cartel's president blaming the current oil price on mismanagement of the US economy. CNBC's Steve Sedgwick speaks to some of the key figures at OPEC.

Many analysts believe oil's rally will be short-lived. Falling demand for overall petroleum products, which was down 3.4 percent over the last four weeks compared to the same time last year, suggest prices could drop steeply once the dollar-driven oil investment frenzy runs out of steam, analysts said.

OPEC ministers cited falling demand in announcing their decision to hold production steady. (See more in CNBC video at left.) Gasoline demand is off about 1 percent over the last six weeks compared to the same period last year, according to EIA data. At the same time, gasoline supplies rose last week to a 15-year high, Evans said.

"Clearly, refineries have enough crude oil to produce an abundance of gasoline," Evans said.

OPEC did pledge to keep a close eye on oil supply and demand, and said it could change its output levels quickly if needed.

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. 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, and are low in historic terms.

Refiners ramped up production for the second week in a row, boosting activity by 1.2 percent to 85.9 percent of capacity, beating analyst forecasts.

Oil pulled other energy futures higher Wednesday. April gasoline rose 11.3 cents to settle at $2.6421 a gallon on the Nymex, and April heating oil futures jumped 15.13 cents to settle at $2.9431 a gallon.

Contact Commodities

  • CNBC NEWSLETTERS

    Get the best of CNBC in your inbox

    › Learn More