AP
Oil Prices Jump on Inventory Report
Wednesday March 26, 3:44 pm ET
By John Wilen, AP Business Writer
Oil Prices Jump After Government Says Fuel Inventories Were Lower Than Expected Last Week


NEW YORK (AP) -- Oil prices soared more than $4 a barrel Wednesday as two big market drivers -- lower than expected fuel inventories and another slide in the dollar -- had traders buying in force for the first time in a week.

Prices rose across the energy spectrum, marking a reversal in sentiment from last week when falling demand for oil, gasoline and other fuels and a strengthening dollar pulled oil down nearly 10 percent from a record near $112.

The Energy Department's Energy Information Administration said Wednesday that gasoline and distillate supplies, which include heating oil and diesel fuel, dropped much more than forecast last week, while crude oil inventories were unchanged. Analysts surveyed by Dow Jones Newswires had expected crude supplies to rise by 1.7 million barrels.

Investors were already buying oil before the release of the report; the falling dollar, which was hurt Wednesday by disappointing economic data, again raised oil's appeal as a hedge against inflation.

Light, sweet crude for May delivery rose $4.68 to settle at $105.90 a barrel on the New York Mercantile Exchange.

"The bullish inventory report on top of the concerns about the dollar is just exacerbating the move that we already had," said Phil Flynn, an analyst at Alaron Trading Corp. in Chicago.

The inventory report stoked worries that supplies of gasoline in particular are falling at a time when analysts would like to see them rising in advance of peak summer driving season. Gasoline inventories slid by 3.3 million barrels last week, more than four times the decline analysts had expected.

In part, that's because refinery activity dropped when analysts had expected an increase. Analysts said some refiners are cutting gasoline production due to low profit margins. Valero Energy Corp. joined them Wednesday, cutting output at its Corpus Christi, Texas, refinery due to high supplies and falling demand, Dow Jones Newswires reported. Gasoline supplies are 9 percent higher than a year ago. While gas prices are near records, they have not kept pace with crude's recent rally.

Investors shrugged off data showing that demand for gasoline fell 1.3 percent last week.

"Prices are so high, that they're having an impact on demand," said Tim Evans, an analyst at Citigroup Inc.

At the pump, gas prices rose 0.6 cent overnight to a national average of $3.261 a gallon, according to AAA and the Oil Price Information Service. Prices have slid recently from a record of $3.285 a gallon set last week, largely because of oil's decline last week.

But with oil now on the rebound, gas prices could rise further. The Consumer Federation of America predicted Wednesday that prices could jump another 75 cents a gallon over the next two months if refiners continue cutting production. That would be bad news for consumers also bearing the burden of falling home values and high food prices. Diesel fuel, which is used to transport the vast majority of the nation's food and goods, rose 0.1 cent overnight to a national average of $4.027 a gallon, a cent shy of a record set Saturday.

In economic news, the Commerce Department said new home sales fell last month to a 13-year low, and that orders for durable goods fell in February when analysts had expected an increase. Many investors view weak economic news as a sign that the Federal Reserve will cut interest rates more sharply than expected later this year. Lower interest rates tend to further weaken the dollar, which boosts oil prices.

"Bad economic news is good news for commodity futures," Flynn said.

Other energy futures also rose Wednesday. April heating oil futures jumped 11.9 cents to settle at $3.0438 a gallon, and April gasoline futures rose 6.27 cents to settle at $2.7429 a gallon.

April natural gas futures rose 15.3 cents to settle at $9.572 per 1,000 cubic feet.

In London, May Brent crude rose $3.39 to settle at $103.99 a barrel on the ICE Futures exchange.