AP
Oil Nears $95 on Supplies, Fed Rate Cut
Wednesday October 31, 4:47 pm ET
By John Wilen, AP Business Writer
Futures Surge As Supplies Fall Sharply for Second Week and the Fed Cuts Interest Rates


NEW YORK (AP) -- Oil futures soared again Wednesday to a new record near $95 a barrel after the government reported another unexpected drop in crude oil inventories and the Federal Reserve cut interest rates by a quarter point.

Interest rate cuts generally support oil prices because they tend to send the dollar downward; the dollar is already at a record low against the euro. Oil futures have been driven to record levels in recent months partly because they offer a hedge against a weak dollar.

However, many stock and bond investors were disappointed by the Fed's warning that further interest rate cuts weren't assured because of the risks of inflation -- which is being driven in part by higher energy prices. Indeed, oil investors initially seemed unhappy with the Fed's warning. Crude prices dropped as much as a dollar from earlier highs immediately after the decision was announced, before rebounding due to the greater impact of last week's surprise decline in inventories, the second straight unanticipated drop.

Light, sweet crude for December delivery rose $4.15 to settle at $94.53 a barrel on the New York Mercantile Exchange after rising as high as $94.74, a new trading record. Crude prices are near inflation-adjusted highs hit in early 1980. Depending on the how the adjustment is calculated, $38 a barrel then would be worth $96 to $101 or more today.

In its weekly inventory report, the Energy Department's Energy Information Administration said oil supplies fell by 3.9 million barrels last week. Analysts surveyed by Dow Jones Newswires, on average, had expected an increase of 100,000 barrels.

Much of that decline was due to a big drop in crude supplies at a closely-watched oil terminal in the Midwest.

"The market is clearly reacting to the larger than expected 3.9 million barrel drop in crude oil inventories, including a stunning 3.1 million barrel drop at the Cushing, Okla., delivery point for the Nymex (crude) futures," wrote Tim Evans, an analyst at Citigroup Inc. in New York, in a research note.

Cushing supplies have been under pressure in recent months due to differences in the price between front-month oil contracts and those for delivery in future months. This price difference, or spread, has given storage tank owners a financial incentive to sell their oil, rather than hold it in inventory. Analysts have also blamed falling Cushing supplies, in part, for the rally in which oil prices have jumped 35 percent since August.

"It's all about Cushing," said Jim Ritterbusch, president of Ritterbusch and Associates in Galena, Ill., "That's going to just keep ... investment capital roaring into this market."

Other energy futures followed oil's lead. November gasoline jumped 8.29 cents to settle at $2.34 a gallon on the Nymex. Gasoline prices were also supported by news of a fire Wednesday at a 172,000 barrel-per-day London refinery owned by Swiss-based Petroplus Holdings AG.

November heating oil added 8.32 cents to settle at $2.5078 a gallon. November gas and heating oil futures expired Wednesday afternoon.

December natural gas rose 30.9 cents to settle at $8.33 per 1,000 cubic feet on the Nymex.

In London, December Brent crude rose $3.19 to settle at $90.63 a barrel on the ICE Futures exchange.

The EIA also reported that refinery activity fell by 0.9 percentage point last week to 86.2 percent of capacity. Analysts had expected an increase of 0.5 percentage point.

Supplies of gasoline rose last week by 1.3 million barrels. Analysts expected a 400,000-barrel decrease.

And inventories of distillates, which include heating oil and diesel fuel, rose by 800,000 barrels. Analysts had expected a 1 million barrel decrease.

Crude imports rose last week by an average of 278,000 barrels a day to 9.4 million barrels a day. Gasoline imports jumped last week by 400,000 barrels a day to an average of 1.2 million barrels a day.

Gasoline demand dipped by 18,000 barrels last week last week, but has risen over the last four weeks by about 0.3 percent over the same period last year.

It was the second week in a row the EIA reported a sharp and unexpected drop in oil inventories. Last week's 5.3-million barrel decline sparked a 10 percent price rally.

John Duff, manager of the EIA's weekly report, said part of the drop in Cushing inventories likely occurred during the previous week, but that reporting was delayed due to a late or incomplete survey response.

It could take several days for the full impact of this week's report to be felt, Ritterbusch said.

"As soon as I saw the drop in Cushing stocks, it looked to me like (this) has $95 (a barrel oil) written all over it," Ritterbusch said.