AP
Oil Hits $97 on Bombs, Demand Forecast
Tuesday November 6, 5:01 pm ET
By John Wilen, AP Business Writer
Crude Prices Soar Past $97 a Barrel on Middle East Bombings, Government Demand Expectations


NEW YORK (AP) -- Oil futures jumped to a new record above $97 a barrel Tuesday after bombings in Afghanistan and an attack on a Yemeni oil pipeline compounded the supply concerns that have driven crude prices higher in recent weeks.

Those concerns were also fed by a government prediction on Tuesday that domestic oil inventories will fall further this year while consumption rises.

At the pump, meanwhile, gas prices continued to rise, following oil's 39 percent price rally since August. The national average price of a gallon of gas jumped 2 cents overnight to $3.024 a gallon, according to AAA and the Oil Price Information Service.

Separately, the federal Energy Information Administration reported that diesel fuel prices reached a national average of $3.303 a gallon, a new record.

Light, sweet crude for December delivery rose $2.72 to settle at a record $96.70 a barrel on the New York Mercantile Exchange Tuesday after earlier rising as high as $97.10, a new trading record.

Oil's seemingly relentless climb raises the question of how high energy prices will go. If crude does keep going up, it might be some time until consumers see relief at the pump. Some analysts predict prices could rise as high as $3.50 to $4 a gallon next summer.

The Energy Information Administration is predicting gas prices will remain above $2.90 a gallon for the rest of the year, and will set a new record national average of $3.235 a gallon by May. In May 2007, prices peaked at $3.227 a gallon as refiners, faced with a series of unexpected outages, struggled to produce enough gas to meet demand.

Meanwhile, estimates of where oil is headed from here range from $50 a barrel to $120. Some analysts believe supplies will get tighter as the year wears on, supporting prices. Others argue that prices have been driven artificially higher by speculative investing.

The EIA expects crude oil prices to rise from an average of $71.36 a barrel this year to $79.92 a barrel next year.

On Tuesday, oil was already up before news of the blasts in northern Afghanistan that killed 28 people and the attack in Yemen. Severe weather forecasts for the North Sea, expectations that domestic crude supplies fell last week and the weak dollar all contributed to the latest move upward.

While Afghanistan doesn't produce much oil, traders watch for the possibility that any escalation in the conflict there between U.S. armed forces and Islamic militants could spill over into other countries, disrupting oil supplies out of the Middle East.

John Kilduff, vice president of risk management at MF Global UK Ltd., noted that the attack in Yemen "has disrupted a pipeline that carries 155,000 barrels a day of crude."

Meanwhile, investors believe crude supplies are declining in the U.S. Analysts surveyed by Dow Jones Newswires predict, on average, that crude oil inventories fell by 1.6 million barrels last week. The EIA will issue its weekly inventory report on Wednesday. Oil futures' rise above $90 a barrel has been fueled in part by two weeks of unexpected declines in inventories.

On Tuesday, the EIA predicted oil consumption will rise in the fourth quarter and next year despite higher prices, and that inventories will fall.

"Strong demand, limited surplus capacity, falling inventories and geopolitical concerns continue to weigh on the market," the EIA said in its monthly Short-Term Energy Outlook.

The weak dollar, which fell to a new low against the euro Tuesday, is also lifting oil prices. Oil futures offer a hedge against a weak dollar, and oil futures bought and sold in dollars are more attractive to foreign investors when the greenback is falling.

Oil prices settled 66 percent higher Tuesday than on Jan. 3, the first trading day of the year. But Tuesday's trading record of $97.10 a barrel is up 95 percent from this year's trading low of $49.90, set Jan. 18.

Other energy futures also rose Tuesday. December gasoline futures jumped 5.39 cents to settle at $2.435 a gallon on the Nymex, while December heating oil futures added 6.39 cents to settle at $2.6078 a gallon.

Natural gas for December delivery fell 13.6 cents to settle at $7.863 per 1,000 cubic feet on the Nymex on predictions for mild temperatures next week in the Midwest and Northeast, and expectations that inventories, already at record levels, will continue to rise.

In London, Brent crude rose $2.77 to settle at $93.26 a barrel on the ICE Futures exchange. A number of North Sea oil platforms were being evacuated Tuesday in advance of expected severe weather.

On Wednesday, analysts also expect the EIA to report that gasoline inventories rose by 200,000 barrels during the week ended Nov. 2, while supplies of distillates, which include heating oil and diesel fuel, fell by 500,000 barrels.

The analysts expect that refinery use grew by 0.8 percentage point to 87 percent of capacity.

Oil inventories likely fell due to a suspension of output at Mexico's state oil company Petroleos Mexicanos, a major crude exporter to the United States, which temporarily shut its ports last week due to severe weather.

"The oil market is really supported by the tight inventories in the U.S. market and the general expectations for the inventory report this week are that the crude inventories will likely fall," said Victor Shum of Purvin & Gertz Inc. in Singapore.

Crude prices are within the range of inflation-adjusted highs set in early 1980. Depending on the how the adjustment is calculated, $38 a barrel then would be worth $96 to $103 or more today.

Associated Press Writers Pablo Gorondi in Budapest and Gillian Wong in Singapore contributed to this report.