Oil Rises to Record $80.18

Oil Rises to Record $80.18 on Larger-Than-Expected Supply Drop
By Mark Shenk
Sept. 12 (Bloomberg)

Crude oil rose to a record $80.18 a barrel in New York after supplies dropped the most this year.

U.S. oil inventories fell a greater-than-expected 7.01 million barrels to 322.6 million last week, the Energy Department said today. Prices also rose after OPEC said yesterday it would increase production by 500,000 barrels a day, less than is needed to meet a seasonal rise in demand.

``We've shrugged off OPEC's offer of 500,000 barrels,'' said Nauman Barakat, senior vice president of global energy futures at Macquarie Futures USA Inc. in New York. ``There's a tropical storm in the Gulf and inventories posted a huge decline.''

Crude oil for October delivery rose $1.68, or 2.2 percent, to settle at $79.91 a barrel at 2:54 p.m. on the New York Mercantile Exchange, a record close. Futures also touched the highest intraday price since trading began in 1983. The previous record of $78.77 was reached on Aug. 1.

The average cost of oil used by U.S. refiners averaged $37.48 a barrel in March 1981, or $84.73 in today's dollars, according to the Energy Department. Prices rose from 1979 through 1981 after Iran cut oil exports.

Brent crude oil for October settlement rose $1.30, or 1.7 percent, to $77.68 a barrel on the London-based ICE Futures Europe exchange, the highest since Aug. 7, 2006.

A 2.7 million barrel drop in oil supplies was expected, according to the median of responses by 17 analysts surveyed by Bloomberg News before today's report.

``Seven million barrels is an awful lot of oil to lose in one week,'' said Rick Mueller, an analyst with Energy Security Analysis Inc. in Wakefield, Massachusetts. ``There's a feeling that OPEC waited too long to make this move.''

Two Tropical Depressions

Oil also rose after the National Hurricane Center said Tropical Storm Humberto formed off the coast of Texas in the northwestern Gulf of Mexico. Tropical storms or hurricanes spur prices higher because they can threaten offshore production.

Some manufacturers and utilities can switch between oil- based fuels and natural gas depending on costs.

``There's a huge amount of hedge fund money moving into the long side of the crude-oil market,'' said James Ritterbusch, president of Ritterbusch & Associates in Galena, Illinois. ``The global supply balance will be tight as we go into the fourth quarter. There's already a lot of concern about low stocks.''

Oil prices have risen 31 percent this year as hedge funds and other speculators purchased futures because of surging energy demand. Long positions are bets that prices will rise.

OPEC Production

OPEC will target crude production of 27.2 million barrels a day after abandoning its former quotas. The 500,000 barrel-a-day increase will be on top of actual output, according to Kuwait's acting oil minister, Mohammed Abdullah al-Aleem.

``Too much attention was paid to what the Iranians, Venezuelans and Nigerians said before the meeting,'' said Brad Samples, commodity analyst for Summit Energy Services Inc. in Louisville, Kentucky. ``The Saudis and other Gulf producers are the swing producers, the only members with spare capacity, and have the greatest influence. The Saudis had been silent.''

Before the decision, OPEC members including Venezuela, Algeria, Iran and Libya had said the world was adequately supplied with oil. Western officials, including the head of the International Energy Agency and U.S. Energy Secretary Samuel Bodman, lobbied for increased output.

November Maintenance

The United Arab Emirates is expected to cut crude oil production in November by as much as 600,000 barrels a day because of maintenance, reducing output by about one quarter, the IEA said.

``The supply and demand is pretty OK,'' Royal Dutch Shell Plc Chief Executive Officer Jeroen van der Veer said at a briefing with reporters in Calgary today. ``What we do have is a lot of psychology in the price. We have to expect volatility in the oil price due to this psychological component.''

The IEA, an adviser to 26 industrialized nations, said global oil demand will rise 1.4 percent to 85.9 million barrels a day this year, in a monthly report. Consumption will increase 2.1 million barrels a day in 2008.

`Big Question'

``The IEA report is still bullish, even with the downward revisions,'' Mueller said. ``They are still looking for pretty strong gains in demand. It doesn't appear that they are too worried about the subprime crisis hurting demand.''

The agency reduced its demand forecast for this year by 90,000 barrels a day and by 160,000 barrels a day in 2008 from last month's forecast.

``There's still a big question of how the credit crunch will ultimately affect demand,'' said Eugene X. Hodge, a managing director at John Hancock Financial Services Inc. in Boston, who manages a $4.3 billion oil and gas company bond portfolio. ``It's too early to know what will happen.''