Bloomberg: Oil Surges, Gasoline Rises to Record as U.S. Refinery Use Falls

Oil Surges, Gasoline Rises to Record as U.S. Refinery Use Falls

March 2 (Bloomberg) -- Crude oil rose above $53 a barrel for the first time in four months and gasoline surged to an all-time high on concern that oil production and refining capacity are not keeping up with rising demand.

Refineries used 89.3 percent of their capacity in the week ended Feb. 25, the lowest since October when companies were performing repairs after a hurricane hit the Gulf of Mexico, the Energy Department report showed. Hedge-fund managers and other large speculators purchased contracts after the report was released at 10:30 a.m. today, bidding prices higher.

``There has been a string of refinery disruptions when we need all of our refineries to be up and running,'' said John Kilduff, senior vice president of energy risk management with Fimat USA in New York. ``There is a speculative element as well. There are too many dollars chasing too few barrels of oil.''

Crude oil for April delivery gained $1.37, or 2.7 percent, to $53.05 a barrel on the New York Mercantile Exchange, the highest close since Oct. 26. Prices are up 45 percent from a year ago.

Gasoline for April delivery rose 8.11 cents, or 5.8 percent, to $1.4838 a gallon in New York, the highest close since the contract began trading in 1984. Prices are 30 percent higher than a year ago.

The average U.S. retail price for regular gasoline rose 2.3 cents to $1.928 a gallon in the week ended Feb. 28, the Energy department reported on Feb. 28. The price is up 12 percent from $1.717 a gallon a year ago.

U.S. stocks declined on concern that the rising energy prices will hurt company profits. The Dow Jones Industrial Average fell 18.03, or 0.2 percent, to 10,811.97. The Standard & Poor's 500 Index was down 0.33 at 1210.08.

Oil company stocks advanced with oil prices. Exxon Mobil Corp., the world's biggest publicly traded oil company, rose 58 cents, or 0.9 percent, to $62.68 in New York Stock Exchange composite trading.

Refinery Disruptions

Lyondell-Citgo Refining LP, a joint venture between Lyondell Chemical Co. and Citgo Petroleum Corp., shut a unit at its Houston crude-oil refinery yesterday, state regulators said.

Lyondell Chemical spokesman David Harpole declined to comment on the report or the refinery's operations. The refinery can process 265,000 barrels of crude oil a day.

A fire on Feb. 26 at BP Plc's Whiting, Indiana, refinery didn't reduce crude-oil processing or fuel production at the company's second-largest plant, a spokesman said.

U.S. Inventories

U.S. crude-oil inventories gained 2.4 million barrels to 299.4 million, the highest since July. The median forecast of 12 analysts surveyed by Bloomberg was for a rise of 1 million barrels. Gasoline stockpiles climbed 973,000 barrels to 224.5 million. Analysts expected an increase of 1.1 million barrels.

Inventories of distillate fuel, a category that includes heating oil and diesel, fell 1.7 million barrels to 110 million, the report showed. Analysts expected a 1.2 million barrel decline.

``The crude number was slightly bigger than expected while the gasoline and distillate numbers were right on the money,'' said Ed Silliere, vice president of risk management at Energy Merchant LLC in New York. ``The most important thing about the numbers is that they are out of the way, which is allowing the funds to come in and buy crude with both hands.''

Speculators, including investment funds, last week had their biggest bet on higher oil prices in eight months, according to the Commodity Futures Trading Commission. So-called net-longs in New York soared by 22,548 contracts to 54,176 in the week ended Feb. 22, the commission reported. The net-long positions peaked at 82,451 contracts in March 2004.

Funds

Increased fund buying may boost commodity prices, Kevin Norrish, head of commodities research at Barclays Capital in London, said in a report yesterday. Funds are reaping the higher returns of investing in commodities. The Reuters-CRB index rose 11 percent last year compared with 9 percent for the Standard & Poor's 500 Index. Oil in New York gained 34 percent last year.

Prearranged agreements to buy or sell futures, known as stops, were clustered at $52.50 a barrel, Silliere said. We are now ``looking at the record $55.67 and the funds will then aim at $60,'' he said.

Oil surged to a record $55.67 a barrel in New York on Oct. 25 because of high global demand, particularly from China, and the threat of disruptions to oil shipments from Iraq, Russia and Nigeria.

Restraining Demand

``Oil prices will likely stay in the $40- to $50-per-barrel range and may have to move higher still to restrain demand,'' said James Buckee, chief executive of Calgary-based Talisman Energy Inc. The company produces oil and gas in North America, Asia, the U.K. and Middle East.

Prices surged in 1974 after an oil embargo that followed the Arab-Israeli war and from 1979 through 1981 after Iran cut oil exports. The average cost of oil used by U.S. refiners was $35.24 a barrel in 1981, according to the Energy Department, or $75.71 in today's dollars.

The Organization of Petroleum Exporting Countries, which pumps about 40 percent of the world's oil, is concerned that rising inventories will lead to a decline in prices during the second quarter of the year. OPEC will discuss production targets at a meeting in Isfahan, Iran, on March 16.

The 11-member group's president, Sheikh Ahmad Fahd al-Ahmad al-Sabah, who is also the Kuwaiti oil minister, said in January OPEC may be willing to let global inventories get large enough to cover 56 days of demand before it cuts supplies. Al-Sabah said inventories covered 52 days of demand on Jan. 30.

``The higher-than-expected gain in crude oil inventories ensures that OPEC won't be increasing production when they meet,'' said Phil Flynn, vice president of risk management with Alaron Trading Corp. in Chicago.

In London, the April Brent crude-oil futures contract rose $1.11, or 2.2 percent, to $51.22 a barrel on the International Petroleum Exchange, the highest close since Oct. 26.

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Prudent Investor says...

Notice that crude oil has been climbing in spite of increased stockpiles or supplies. On the contrary, there has been an intensive build up of net long positions. Put differently the market sees oil prices climbing either through speculations "too many money chasing oil prices" or anticipations that current supplies will not sufficient to meet demand. For me, this is just part of the unfolding rendition of the 5 year old trend, which is unlikely to be broken given current conditions.