Low supplies, instability spur oil price jump

NEW YORK -- Oil futures rose Thursday after the government reported larger-than-expected declines in crude and heating oil inventories.

In its weekly inventory report, the Energy Department's Energy Information Administration said oil inventories fell by 3.3 million barrels last week, more than double the 1.3 million barrel decline analysts expected. Inventories of distillates, which include heating oil and diesel fuel, fell by 2.8 million barrels, much more than the expected drop of 800,000 barrels.

"(Heating oil) stocks are just plunging," said Stephen Schork, a trader and analyst in Villanova, Pa.

Crude and heating oil supplies have declined more than expected for several weeks running, exacerbating a perception that supplies may be inadequate to meet winter demand.

Light, sweet crude for February delivery rose 65 cents to settle at $96.62 a barrel on the New York Mercantile Exchange after rising as high as $97.79. Heating oil futures for January delivery rose 3.91 cents to settle at $2.6803 a gallon.

At the pump, meanwhile, gas prices rose 0.8 cent overnight to a national average of $2.981 a gallon, according to AAA and the Oil Price Information Service. Pump prices, which typically lag the futures market, rose when oil was approaching $100 a barrel, only to fall when oil retreated by more than $10 from its Nov. 21 peak of $99.29.

The average price of a gallon Thursday in the Chicago area was $3.094, according to the AAA.

With oil prices back on the rise, new records aren't out of sight.

"I think this is really setting the table for a really strong gasoline rally in the spring," Schork said.

Oil prices also rose on news of the assassination of Pakistani opposition leader Benazir Bhutto and a vow by opposition politician Nawaz Sharif to boycott parliamentary elections next month, which raised concerns about geopolitical stability. Sharif also demanded that President Pervez Musharraf resign immediately.

Earlier in the week, oil prices rose when attacks by Turkish forces on Kurdish rebels in northern Iraq raised concerns about Iraqi oil supplies.

"I think the market got about as much bullish news as it can over the last couple days," said James Cordier, president of Liberty Trading Group in Tampa, Fla.

The weaker dollar also supported oil prices Thursday. Crude 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.

Analysts said other aspects of Wednesday's EIA report were also bullish. Gasoline supplies rose last week by 700,000 barrels, about half the 1.4 million barrel increase analysts surveyed by Dow Jones Newswires had expected. January gasoline rose 4.36 cents to settle at $2.4962 a gallon on the Nymex after earlier rising to a record $2.5085.

Refinery activity rose by a 0.3 percentage point last week to 88.1 percent of capacity. Analysts had expected an increase of 0.6 of a percentage point.

"This is just a market that still has a huge question mark with regards to ... refining capacity," Schork said.