Wednesday, August 22, 2007

Oil falls as crude supplies gain

Unexpected rise in crude stocks adds to big drop in prices Tuesday, as Hurricane Dean weakened.

NEW YORK ( -- Oil prices fell Wednesday, adding to Tuesday's big decline, after the government reported a surprise rise in crude oil supplies.

U.S. light crude for October delivery lost 52 cents to trade at $69.05 a barrel on the New York Mercantile Exchange. Oil had traded up 58 cents just prior to the report's release.

In its weekly inventory report, the Energy Information Administration said crude stocks rose by 1.9 million barrels last week. Analysts were looking for a drop of 2.8 million barrels, according to Reuters.

Distillates, used to make heating oil and diesel fuel, rose by 1.3 million barrels. Analyst were looking for a gain of 800,000 barrels.

But gasoline supplies plummeted, falling by 5.78 million barrels. Analysts were looking for a 900,000 barrel decline.

Oil prices tumbled over 2 percent Tuesday, falling below $70 a barrel for the first time since late June, as Hurricane Dean weakened from a Category 5 storm and made landfall in Mexico rather than the refinery-laden U.S. Gulf Coast.

Although more oil comes from Mexican operations in the Gulf than U.S. ones, traders said Mexico's oil rigs were closer to shore and hence better protected than U.S. facilities. They also noted the Mexican Gulf does not have nearly as many refineries.

As a precaution, Mexico has shut in 2.65 million barrels per day of production -- around 80 percent of its output -- and state oil company Pemex has evacuated more than 18,000 staff, according to Reuters.

There was no early information from Pemex on whether oil platforms were damaged as Dean moved across the Yucatan and reentered Gulf waters.

"Dean is projected to barrel through the heart of Mexican oil and natural gas offshore production facilities in the Bay of Campeche as a strong Category 2 or weak Category 3 hurricane and disruptions of oil and natural gas production could be significant," Reuters quoted Goldman Sachs saying in a research note. "This may further tighten already tight oil fundamentals."

Economic worries

Oil prices have fallen from a record $78.77 a barrel set August 1.

Much of the decline has been attributed to defaults in the subprime credit sector. Traders fear tightening credit standards could hurt overall economic growth, reducing demand for oil.

Commodities in general have also suffered from the credit crunch, as investment funds sell commodities to cover losses in stocks and bundles of poorly-performing subprime loans.

Oil prices are currently being affected more by worldwide stock, bond and currency swings rather than crude fundamentals such as supply and demand, said Nauman Barakat, an energy trader at Macquarie Futures, the trading arm of Macquarie investment bank.

"The bigger picture is what is going to happen in the equity market,' said Barakat. "I don't think we are out of the woods just yet."

Like many traders, he said the $70 support level proved tough to break on the way down, and it may prove tough to pass on the way up, adding that U.S. crude could fall to $65 a barrel fairly quickly.

But so far global economic concerns haven't crimped oil demand.

Demand from top Asian consumers has shown little sign of slowing, with implied consumption in China rising 5 percent in July from a year ago, Reuters reported.

For the first seven months of the year, oil demand in China is up 4.5 percent from a year earlier at 6.9 million bpd, although Beijing's efforts to cool its booming economy with another official interest rate rise might check growth.

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