Oil rebounds from early losses on Nigeria strike threat

NEW YORK -- Oil prices climbed more than $2 per barrel on Wednesday, rebounding from earlier losses on reports that Nigerian oil workers are about to strike and as investors focused on a surprise decline in gasoline inventories last week.

Reports that talks between between white-collar Nigerian oil industry workers and Chevron had broken down pushed prices up sharply in late afternoon trading, overshadowed a mixed weekly inventory report from the Energy Department's Energy Information Administration. Nigeria is Africa's largest producer and a major U.S. supplier of crude.

The EIA report said gasoline supplies fell 1.2 million barrels last week, where analysts surveyed by energy research firm Platts were expecting an increase of nearly 1 million barrels. However, the agency also said demand for gasoline is down 1.8 percent, on average, over the last four weeks compared to last year.

Crude oil supplies fell 1.2 million barrels last week, less than the 2 million barrel decline expected by analysts, and inventories of distillates, which include heating oil and diesel fuel, rose 2.6 million barrels -- more than expected.

The mixed data caused prices to jump more than a dollar immediately after the EIA report was issued, only to fall by more than $2 later. But prices rebounded on late afternoon reports out of Nigeria, and light, sweet crude rose $2.67 to settle at $136.68 on the New York Mercantile Exchange. In London, August Brent crude rose $2.72 to settle at $136.44 a barrel on the ICE Futures Exchange.

"Obviously, we're worried about supply, so any kind of headline is going to send prices back up," said Phil Flynn, analyst at Alaron Trading Corp. in Chicago.

Also boosting prices, the dollar reversed earlier gains and lost ground against the euro Wednesday afternoon. Investors buy commodities such as oil as a hedge against inflation when the dollar falls. Also, a weaker dollar makes oil less expensive to investors overseas.

In a separate report Wednesday, the American Petroleum Institute, a trade group, said gasoline demand in the U.S. fell 1.4 percent in May, as measured by deliveries, dragging year-to-date demand for gasoline down by 1 percent. That is the first decline in gasoline demand over the first five months of any year since 1991, API said.

Demand for crude oil over the first five months of the year in the U.S. was off 2.5 percent from last year, API said.

In Washington, President George W. Bush renewed his call to open U.S. coastal waters to oil and gas development to boost production and bring prices down. Florida Gov. Charlie Crist dropped his long-standing support for the federal government's moratorium on offshore drilling.

Bush has argued that Americans are clamoring for relief from surging gasoline costs. But Democrats blasted Bush's proposal as an election year political ploy that would have little impact on short-term gasoline costs since it would take years for any such project to begin production.

While the cost of a gallon (liter) of gasoline in the U.S. is significantly lower than other parts of the West, Americans have been hit hard by prices significantly higher than what they are accustomed to.

The average national price of a gallon of gas slipped 0.3 cent overnight to $4.075 a gallon in the U.S. ($1.07 per liter), according to a survey of stations by AAA and the Oil Price Information Service. It was the second straight decline, bringing prices half a cent below their latest record of $4.08 a gallon, set Monday.

With demand for gasoline falling steadily since January, retailers have had a hard time hiking gas prices fast enough to keep up with rising crude prices. While oil prices have risen 94 percent over the past year, and set a new record of $139.89 a barrel early this week, gas prices are up only 36 percent. That discrepancy has put pressure on the profit margins of companies all along the gasoline supply chain, including refiners, distributors and retailers.

Midwest flooding may create a new wrinkle in the gas price equation; corn and ethanol prices are rising as a result of crop damage and transportation bottlenecks. Rising prices for ethanol, which is used as a gasoline additive, could push gas prices still higher, or limit their declines.

"If you're going to be using less ethanol, you're going to be using more oil," Flynn said.

July natural gas futures rose 25.8 cents to settle at $13.21 per 1,000 cubic feet. Natural gas prices last settled over $13 in December 2005, as they were receding from a spike above $15 in the wake of hurricanes Katrina and Rita.