Oil Soars as U.S. Inventories Shrink

Wed June 25, 2003 01:05 PM ET NEW YORK (<a href=reuters.com>Reuters) - Oil prices surged a dollar on Wednesday after the U.S. government showed an unexpected drop in already tight fuel inventories.

U.S. light sweet crude jumped 97 cents to $29.75 a barrel, ending a run of losses that had cut nearly $3 from 12-week highs hit earlier this month. Benchmark Brent crude rose 85 cents to $27.47 per barrel.

Prices raced up after the Energy Information Administration (EIA) said U.S. crude stocks fell 4.1 million barrels to 284.2 million barrels, 11 percent lower than a year ago. Analysts predicted stocks would rise by 1.1 million barrels.

Leading OPEC producer Saudi Arabia and other members of the OPEC cartel cut back production this month, while a three month halt to exports from Iraq has further tightened supply.

Heavy imports from Saudi Arabia had started to rebuild U.S. stocks which were drained to 26-year lows earlier this year by supply disruptions in Venezuela and Nigeria.

Crude imports fell to 9.3 million barrels per day (bpd) last week, down 970,000 bpd from the previous week, the EIA said.

"It was all in the imports," said Jim Ritterbusch, analyst at Ritterbusch & Associates. "People think you can sit there at capacity imports, at 10 million barrels per day, but you're going to eventually get an occasional downdraft."

Iraq resumed exports over the weekend for the first time since the war and is pumping around 800,000 bpd, but looting and sabotage are likely to keep exports below pre-war levels of 1.7 million bpd for months.

An oil pipeline feeding a key Iraqi refinery was still ablaze on Wednesday after an explosion on Tuesday night, the third pipeline blast in four days, a Reuters eyewitness said.

Iraqi and U.S. authorities have blamed previous pipeline blasts on sabotage, which they suspect is aimed at hampering U.S. efforts to revive the energy sector, key to financing the rebuilding of the country.

The Organization of the Petroleum Exporting Countries, which controls around half of world exports, has called an extraordinary meeting on July 31 to monitor the impact of Iraqi production on the market.

The cartel's president said this week OPEC was unlikely to cut output at that meeting as the slow build-up in Iraqi oil exports has been keeping prices toward the top of the cartel's target range of $22-$28.

Traders said the market could draw even more strength when U.S. Federal Reserve policy-makers announce their decision on interest rates at around 1815 GMT Wednesday.

If they announce a rate cut, as is widely predicted, investment funds would increase oil buying, traders said.

"If it looks like the economy is going to get boosted into activity, the funds will certainly choose oil as one of the commodities to put their money into," said Tony Machacek of Prudential Bache brokerage.