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Crude Oil Drops a Third Day; U.S. May Report Stockpile Increase

Bloomberg | June 8, 2005

Crude oil fell for a third day on expectations the U.S. government will report today that stockpiles of crude and fuels rose last week as OPEC pumped near capacity and refiners accelerated processing.

U.S. refineries probably boosted operation rates to 96.5 percent of capacity in the week ended June 3, a Bloomberg survey of analysts showed, up from 96.2 percent a week earlier. That may ease concern that refiners can't make enough heating oil to meet winter demand. Heating oil prices jumped 11 percent last week.

``People are fearing builds in crude and product stockpiles and that's adding to the weakness in the market,'' said Christopher Bellew, a broker at Bache Financial Ltd. in London. A sustained increase in crude inventories could dissipate speculation about strains in winter-fuel supplies, he said.

Crude oil for July delivery fell 65 cents, or 1.2 percent, to $53.11 a barrel on the New York Mercantile Exchange at 11:50 a.m. London time. Prices are down more than $2 from a six-week high of $55.55 two days ago. Their record was $58.28 in April.

`Big Incentive'

Concern about below-average heating-oil supplies in the U.S. prevailed as the most important reason driving crude prices up by 6.1 percent last week, said Orrin Middleton, an oil marketer at Barclays Capital in London. Higher prices for heating oil than for gasoline may prompt refiners to curb gasoline production and boost winter-fuel output earlier than usual. U.S. gasoline consumption peaks this time of year.

``The market is very focused on the medium- and long- term supply and demand balance,'' said Francisco Blanch, senior energy strategist at Merrill Lynch & Co. in London. ``Refiners have a big incentive to switch to produce heating oil from gasoline right when gasoline demand peaks and that may create further tightness. It's almost like winter in the spring.''

Heating oil was trading higher than gasoline for a fifth day on Nymex. Heating oil for July delivery was almost 9 cents more expensive than gasoline at $1.5921 a gallon at 11:35 a.m. London time, compared with $1.5064 a gallon for gasoline. A year ago, gasoline was about 20 cents higher than heating oil.

Crude Inventories

We are ``baffled as to why oil-product prices have been on such a tear of late, discounting a refinery crunch that has yet to happen or has yet to manifest itself in the inventory data,'' said Edward Meir, a commodity analyst at Man Financial Ltd. in Darien, Connecticut.

Crude stockpiles in the U.S., the world's top oil consumer, probably increased by 250,000 barrels last week, the median forecast of a Bloomberg survey of 14 analysts showed. That would leave them at their highest since 1999.

Brent crude for July settlement fell 65 cents, or 1.2 percent, to $52.48 at 11:50 a.m. on London's International Petroleum Exchange.

The U.S. Energy Department will publish its latest report on petroleum inventories at 10:30 a.m. Washington time.

Distillates

``People are looking at where current crude stock levels are, above their five-year averages,'' Middleton of Barclays said. ``We could very quickly see that crude stockpile buffer dwindle in the next few months. It's distillates that's they key. People are nervous of what could happen with an early cold snap and with lots of hurricanes expected this year.''

Supplies of distillates including heating oil and diesel, still lower than normal partly because Hurricane Ivan disrupted refinery output in September, probably gained by 1.28 million barrels, the survey showed.

Gasoline supplies, which were already 3.4 percent higher than their seasonal average for the past five years the week ended May 27, may have climbed 1.1 million barrels last week, according to the survey.

The Organization of Petroleum Exporting Countries, source of about 40 percent of the world's oil, is pumping almost as much as it can to let inventories rise so refiners can make enough heating fuels for the northern hemisphere's winter.

`Robust' Demand

OPEC President Sheikh Ahmad Fahd al-Sabah yesterday said he would seek a 500,000-barrel-a-day output quota increase at this month's meeting if prices remain high, Agence France-Presse reported. The group of 11 producers, which meets next week in Vienna, is already exceeding its self-imposed production limits.

The U.S. Energy Department expects prices of New York crude will average more than $50 a barrel every month through the end of 2006, because of potential imbalances between supply and demand, it said in a report yesterday.

``Worldwide petroleum demand growth is projected to remain robust during 2005 and 2006,'' the department's Energy Information Administration said in the report. Spare production capacity ``isn't projected to grow significantly over the next two years. Downstream sectors, such as refining and shipping, are expected to remain tight.''

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