U.S. oil inventories fell a greater-than-expected 7.01 million barrels to 322.6 million last week, the Energy Department said today. Prices also rose after OPEC said yesterday it would increase production by 500,000 barrels a day, less than is needed to meet a seasonal rise in demand.
``We've shrugged off OPEC's offer of 500,000 barrels,'' said Nauman Barakat, senior vice president of global energy futures at Macquarie Futures USA Inc. in New York. ``There's a tropical storm in the Gulf and inventories posted a huge decline.''
Crude oil for October delivery rose $1.68, or 2.2 percent, to settle at $79.91 a barrel at 2:54 p.m. on the New York Mercantile Exchange, a record close. Futures also touched the highest intraday price since trading began in 1983. The previous record of $78.77 was reached on Aug. 1.
The average cost of oil used by U.S. refiners averaged $37.48 a barrel in March 1981, or $84.73 in today's dollars, according to the Energy Department. Prices rose from 1979 through 1981 after Iran cut oil exports.
Brent crude oil for October settlement rose $1.30, or 1.7 percent, to $77.68 a barrel on the London-based ICE Futures Europe exchange, the highest since Aug. 7, 2006.
A 2.7 million barrel drop in oil supplies was expected, according to the median of responses by 17 analysts surveyed by Bloomberg News before today's report.
``Seven million barrels is an awful lot of oil to lose in one week,'' said Rick Mueller, an analyst with Energy Security Analysis Inc. in Wakefield, Massachusetts. ``There's a feeling that OPEC waited too long to make this move.''
Two Tropical Depressions
Oil also rose after the National Hurricane Center said Tropical Storm Humberto formed off the coast of Texas in the northwestern Gulf of Mexico. Tropical storms or hurricanes spur prices higher because they can threaten offshore production.
Some manufacturers and utilities can switch between oil- based fuels and natural gas depending on costs.
Natural gas for October delivery rose 50.4 cents, or 8.5 percent, to $6.438 per million British thermal units in New York, the highest close since Aug. 17.
Heating oil for October delivery rose 3.64 cents, or 1.7 percent, to close at a record $2.2191 a gallon in New York. Futures touched $2.2224 a gallon, the highest intraday price since trading began in 1978.
``There's a huge amount of hedge fund money moving into the long side of the crude-oil market,'' said James Ritterbusch, president of Ritterbusch & Associates in Galena, Illinois. ``The global supply balance will be tight as we go into the fourth quarter. There's already a lot of concern about low stocks.''
Oil prices have risen 31 percent this year as hedge funds and other speculators purchased futures because of surging energy demand. Long positions are bets that prices will rise.
OPEC Production
OPEC will target crude production of 27.2 million barrels a day after abandoning its former quotas. The 500,000 barrel-a-day increase will be on top of actual output, according to Kuwait's acting oil minister, Mohammed Abdullah al-Aleem.
``Too much attention was paid to what the Iranians, Venezuelans and Nigerians said before the meeting,'' said Brad Samples, commodity analyst for Summit Energy Services Inc. in Louisville, Kentucky. ``The Saudis and other Gulf producers are the swing producers, the only members with spare capacity, and have the greatest influence. The Saudis had been silent.''
Before the decision, OPEC members including Venezuela, Algeria, Iran and Libya had said the world was adequately supplied with oil. Western officials, including the head of the International Energy Agency and U.S. Energy Secretary Samuel Bodman, lobbied for increased output.
November Maintenance
The United Arab Emirates is expected to cut crude oil production in November by as much as 600,000 barrels a day because of maintenance, reducing output by about one quarter, the IEA said.
``The supply and demand is pretty OK,'' Royal Dutch Shell Plc Chief Executive Officer Jeroen van der Veer said at a briefing with reporters in Calgary today. ``What we do have is a lot of psychology in the price. We have to expect volatility in the oil price due to this psychological component.''
The IEA, an adviser to 26 industrialized nations, said global oil demand will rise 1.4 percent to 85.9 million barrels a day this year, in a monthly report. Consumption will increase 2.1 million barrels a day in 2008.
`Big Question'
``The IEA report is still bullish, even with the downward revisions,'' Mueller said. ``They are still looking for pretty strong gains in demand. It doesn't appear that they are too worried about the subprime crisis hurting demand.''
The agency reduced its demand forecast for this year by 90,000 barrels a day and by 160,000 barrels a day in 2008 from last month's forecast.
``There's still a big question of how the credit crunch will ultimately affect demand,'' said Eugene X. Hodge, a managing director at John Hancock Financial Services Inc. in Boston, who manages a $4.3 billion oil and gas company bond portfolio. ``It's too early to know what will happen.''
Via| Bloomberg| by Mark Shenk
IEA Cuts 2008 Oil Demand Forecast on U.S. Economy
The International Energy Agency, an adviser to 26 industrialized nations, cut its forecast for global oil demand on lower estimates for U.S. economic growth. Global oil demand will be 88.02 million barrels a day next year, a decline from last month's forecast of 88.18 million, the Paris-based IEA said today in its monthly report. The demand forecast for this year was also cut.
The impact of a slowing economy and high prices may lead to further revisions later this year, the report said. Oil has risen 5.7 percent this month to trade near record highs, prompting the Organization of Petroleum Exporting Countries to increase production by 500,000 barrels a day at a meeting yesterday.
``Economic growth will probably suffer to some degree, conferring a downside risk to oil demand, but the impact is as yet very uncertain,'' the IEA report said. ``The turmoil from the U.S. subprime mortgage market remains at the heart of every musing on oil markets.''
The IEA based its estimates on a report last week by the Organization of Economic Cooperation and Development that lowered forecasts for economic growth in the U.S. and Europe, and said they may be further reduced following the collapse of the U.S. subprime market.
``We do not know yet if there will be any contagion'' beyond the U.S., Lawrence Eagles, chief author of the monthly report, said today in a telephone interview. ``If you have the impact only in the U.S. you will still have growth elsewhere.''
Trim Forecasts
The OECD on Sept. 5 trimmed its 2007 forecast for U.S. growth to 1.9 percent from a May figure of 2.1 percent and for the euro region to 2.6 percent from 2.7 percent. Deeper reductions were possible in the future, the organization said. The IEA is an arm of the OECD.
The IEA lowered global demand for 2007 to 85.92 million barrels a day, 90,000 barrels a day less than its previous assessment. The IEA still expects oil demand to rise year-on- year in 2007 and 2008, albeit at a slower pace.
Oil demand in the world's largest economies will increase by 0.4 percent in 2007 and 1.6 percent in 2008, the report said.
Crude prices have averaged $65.19 a barrel so far this year, about $40 more than the average price in 2002. OPEC's pledge yesterday is the first time in more than a year the group agreed to increase oil production.
The 12-member group, which produces 40 percent of the world's crude oil, will boost output starting on Nov. 1, and increase its new quota target to 27.2 million barrels.
`Market Requests'
``OPEC is reacting to the market requests, but we would have wanted more oil in the market,'' said IEA analyst Eduardo Lopez in an interview in Spanish. ``We would have liked OPEC to anticipate the increase in production. November is quite late.''
The price of crude oil rose 17 cents, 0.2 percent, to $78.40 in trading on the New York Mercantile Exchange at 1:21 p.m. in London. The contract rose 74 cents to $78.23 yesterday, the highest close since trading began in 1983.
The ``call on OPEC,'' an IEA estimate of how much crude is needed from OPEC to balance global markets, was reduced by 300,000 barrels a day for the fourth quarter of this year to 32.4 million barrels a day. The reduction reflects the IEA's reduced expectation for world oil demand.
For all of 2008, the ``call on OPEC'' was reduced by 200,000 barrels a day to 31.4 million barrels a day, the IEA said. The 2008 estimate is 1 million barrels higher than OPEC's crude output last month, according to IEA figures.
`Excess Production'
``The demand forecast still remains relatively strong,'' said Harry Tchilinguirian, an energy analyst with BNP Paribas in London who previously worked for the IEA. ``The OPEC decision was a token gesture. In essence they are legitimizing excess production. We're still looking at global demand outpacing supply.''
Production of crude oil from OPEC's 12 members, including new member Angola, fell 90,000 barrels a day in August to an average 30.41 million barrels a day, the IEA estimated. The fall was led by Iraq, which pumped 230,000 fewer barrels a day in August compared with July.
Saudi Arabian crude output rose 20,000 barrels a day last month, to 8.42 million barrels a day, the IEA said. OPEC's spare capacity remains below 3 million barrels a day, the report said.
The IEA left its estimate of non-OPEC oil production for 2007 effectively unchanged at 50.02 million barrels a day.
Non-OPEC producers will add more than 1 million barrels of production in 2008 as output from Canada's oil sands, Mexico, Azerbaijan, Brazil and Malaysia all increase, boosting production to 51.07 million barrels, the IEA said.
Via|Bloomberg|by Bill Murray
