Oil Rises to Record $94.74

Oil Rises to Record $94.74 as U.S. Supplies Fall to 2-Year Low
By Mark Shenk
Oct. 31 (Bloomberg)

Crude oil rose to a record $94.74 barrel in New York after an Energy Department report showed that U.S. inventories fell to a two-year low. Today's 4.6 percent gain was the biggest since Jan. 30.

Stockpiles dropped 3.89 million barrels to 312.7 million barrels last week, the department said. It was the lowest since October 2005. A 400,000 barrel gain was expected, according to a Bloomberg News survey. Supplies at Cushing, Oklahoma, the delivery point for New York futures, fell 17 percent.

``We've lost a lot of oil at a time when we should be building supply for winter,'' said Phil Flynn, a senior trader at Alaron Trading Corp. in Chicago. ``Nearly all the analysts expected inventories to rise, making this an extremely bullish number.''

Crude oil for December delivery rose $4.15 to settle at $94.53 barrel at 2:50 p.m. on the New York Mercantile Exchange. Futures touched $94.74 the highest since trading began in 1983. The exchange reported a high of $94.80 during the session and subsequently canceled the trade.

Oil rose 16 percent in October, the biggest one-month gain since September 2004. Prices are up 61 percent from a year ago.

The futures plunged 3.4 percent yesterday after Goldman Sachs Group Inc., which said in July oil may reach $95 a barrel, told clients it was ``time to take profits.''

``The DOE report was the catalyst for this breakout,'' said John Kilduff, vice president of risk management at MF Global Ltd. in New York. ``Prices are also up because of the falling dollar and strong GDP number, which is a sign that demand will pick up. Economic growth both here and abroad are leaving us vulnerable to the myriad of supply threats out there.''

Economic Growth

Economic growth in the U.S. unexpectedly accelerated in the third quarter as increases in exports, consumer spending and investment made up for another plunge in home construction, a government report today showed. Gross domestic product grew at an annual rate of 3.9 percent in the quarter, the most since the first three months of 2006.

Oil inventories at Cushing, where West Texas Intermediate and other sweet, or low-sulfur, grades of oil are delivered for the futures market, dropped to 15.1 million barrels, the lowest since October 2005. Today's decline was the biggest since November 2004, Energy Department data show.

``There is no reason I can think of for a refiner to buy a single barrel to put a barrel in inventories,'' said Tim Evans, an analyst with Citigroup Global Markets Inc. in New York. ``Crude oil is expensive, refinery margins are weak, product inventories are rising anyway and backwardation makes it very dangerous to hold into oil.''

Backwardation

New York crude oil futures closest to delivery are more expensive than the prices for contracts for later delivery, a condition known as backwardation. During the first half of the year the market was in contango, where oil for future delivery is higher than near-month prices. Contango trading encourages companies to increase stockpiles.

``The bottom line is that there isn't enough sweet crude to meet demand,'' said Ric Navy, a broker at BNP Paribas SA in New York. ``We've almost erased yesterday's correction and may get another leg up if the Fed makes an interest rate cut.''

The Federal Reserve today announced a quarter-point interest rate reduction to bolster economic growth. Crude-oil surged and the dollar plunged after the Federal Reserve cut its benchmark interest rate by half a percentage point on Sept. 18, more than economists had predicted.

Weak Dollar

``When the dollar is weak, a lot of overseas investors seek a safe haven in commodities, such as gold and oil,'' said James Ritterbusch, president of Ritterbusch & Associates in Galena, Illinois. ``Falling interest rates also have bullish implications for demand because it may boost economic growth. A weak dollar also cushions European consumers somewhat against higher prices.''

Brent crude oil for December settlement rose $3.19, or 3.7 percent, to $90.63 a barrel on the London-based ICE Futures Europe exchange, a record close. Brent reached $90.94 a barrel during today's session, a record intraday price.

The Organization of Petroleum Exporting Countries agreed last month to raise output by 500,000 barrels a day starting tomorrow to help ease prices that threaten economic growth. The move failed and prices have jumped 17 percent since the Sept. 11 announcement of the increase.

``Global demand for oil largely exceeds the production of non-OPEC countries and the difference is not matched by OPEC, so there is tension on the market,'' said Harry Tchilinguirian, an analyst at BNP Paribas in London. ``Oil-consuming countries will certainly be putting pressure on OPEC to increase output, but in the short term we don't anticipate a production increase above 500,000 barrels a day.''

Goldman closes out long positions

Goldman Says `Take Profits' After Crude Hits Record
By Mathew Carr and Margot Habiby
Oct. 30 (Bloomberg)

Goldman Sachs Group Inc., the bank that said in July oil may reach $95 a barrel, told clients it was ``time to take profits'' after crude rose to a record $93.80 in New York yesterday.

``We are now more cautious on the near-term upside potential for oil prices,'' analysts including Jeffrey Currie in London said in the bank's Energy Weekly today. ``We are not trying to call a top here, just take profits.''

Goldman said it was closing its long positions in New York oil futures. Oil has gained 51 percent this year as hedge funds and other large speculators increased bets on rising prices. Net-long positions in New York crude futures in the week ended Aug. 3 jumped to the highest in more than a decade.

Goldman predicted in March 2005 that oil would enter a ``super spike'' period, fueled by rising demand, and could reach $105 a barrel in the next several years.

Crude oil for December delivery fell $3.15, or 3.4 percent, to settle at $90.38 a barrel on the New York Mercantile Exchange. The price for March delivery was at $87.99 a barrel and at $82.92 for December next year.

``The downside risks we have embedded in our end of first quarter 2008 oil price target of $80 a barrel are beginning to gain momentum,'' Goldman said in the report. ``These include increasing exports, a slowing U.S. economy, an adequate level of heating oil inventories.''

Cold Weather Factor

Goldman's recommendation ``might be a bit early,'' especially if colder weather boosts demand during the next two months, said Francisco Blanch, a London-based analyst at Merrill Lynch & Co. Blanch predicts oil will average $80 a barrel for the three months through December, and that prices are more likely to reach $100 soon than $60.

Twenty-one, or 49 percent, of 43 analysts surveyed by Bloomberg News last week said oil prices will fall through Nov. 2, the least bearish response since Sept. 7. Eighteen, or 42 percent, said prices will rise, the most bullish response since the week ended July 6. Four forecast little change. The previous week, 69 percent of respondents said oil would fall.

``I think you'll get some more oil into the U.S.,'' Blanch said today by phone. ``It will take another few months to get it up and running.''

An increase in crude supplies will partly come from the Greater Plutonio oil field in Angola and the Genghis Khan field in the U.S. Gulf of Mexico, which both started this month and will likely ramp up production during the next few weeks, Goldman said.

Freight Rates

``The strength in freight rates from West Africa to the U.S. Gulf Coast suggests that U.S. refineries may be preparing to receive more of the new Angolan low-sulfur medium grade Plutonio,'' Goldman said.

Lehman Brothers Holdings Inc. forecast a ``sharp price fall'' by late winter in a report released today. The Lehman analysts, led by New York-based Edward Morse, said there's a 50 percent chance that Nymex futures will exceed $96.50 a barrel before the December contract expires.

Lehman raised its fourth-quarter forecast for Brent oil by $10 to $85 and said it expects Nymex oil to average about $2.50 a barrel higher than that.

``Our view is that we don't think prices are sustainable where they are,'' Michael Waldron, an energy markets research analyst in New York and one of the authors of the Lehman report, said in a telephone interview earlier today.

OPEC Objectives

OPEC, whose members produce more than 40 percent of the world's oil, said current crude prices don't reflect the group's objectives.

The Organization of Petroleum Exporting Countries has a ``duty'' to supply the world with oil at stable prices, Mohamed al-Hamli, the group's president, said today at an oil conference in London. If the market needs more oil, OPEC will supply it using spare capacity of 3.5 million barrels a day, he said.

OPEC ``recognizes it has a responsibility'' to ensure ``stable'' prices for producers and consumers, he said. Al-Hamli said he doesn't expect oil to reach $100 a barrel in the near future.

Oil Futures Market Is Better Predictor Than Analysts

Oil Futures Market Is Better Predictor Than Analysts
By Bill Murray
Oct. 9 (Bloomberg)

The crude futures markets in London and New York have been more accurate predictors of oil prices than market analysts during the past eight years, Deutsche Bank AG said.

The average forecasting error by the crude futures market since 1999 has been 17 percent, compared with 31 percent by a group of more than 30 oil analysts surveyed by Reuters, senior analysts Michael Lewis and Adam Sieminski said in a note to clients published Oct. 5.

``The hidden truth behind analyst oil price forecasts is that they have more to do with the current spot oil price than prospective oil market fundamentals,'' they wrote. ``We find that for the past nine years the analyst community has consistently under-estimated the oil price.''

In the 1990s, crude traded between $15 and $25 a barrel 85 percent of the time. In the present decade, it has averaged $42 a barrel with greater price volatility, the report said.

Oil prices have quadrupled since January 2002 as surging demand, led by China and the U.S., has left a narrower margin of spare capacity to tap during supply disruptions.

Hurricanes in the U.S. Gulf of Mexico in 2005 and cuts in production from the Organization of Petroleum Exporting Countries helped spur oil prices, which reached a record $83.90 on Sept. 20 this year.

Crude oil for November delivery was up $1.53 at $80.55 a barrel in trading on the New York Mercantile Exchange at 4:06 p.m. London time. Brent crude oil for November was at $77.41 a barrel, up 83 cents, on the London-based ICE Futures Europe exchange.

Brent at $87.80

If the average absolute forecasting error of analysts persists through next year, that would imply Brent crude oil prices in 2008 will actually average $87.80 a barrel, the report said.

The average absolute futures market forecasting error would price Brent at $88.20 a barrel in 2008.

Deutsche Bank itself said oil may fall below $70 a barrel by the end of the quarter as demand for gasoline in the U.S. weakens along with the economy. Oil prices will average $60 a barrel in 2010, the Frankfurt-based bank said.

While oil prices probably won't fall during the fourth quarter as much as they did last year during the same period, fading geopolitical risks, OPEC production growth and economic weakness in the U.S. mean prices are still likely to decline, Deutsche Bank said.

Fuel Consumption

``Futures are saying that in two years prices will be in the low $70s,'' Siemenski said in an interview. ``In addition to the fundamentals of crude, demand has been eroded. Demand has been flat in the U.S. for the past two months.''

U.S. fuel consumption in the four weeks ended Sept. 28 averaged 20.45 million barrels a day, down 0.3 percent from the same period a year earlier, according to the Energy Department.

The Paris-based International Energy Agency, an adviser to 26 industrialized countries, reduced its forecast for global oil demand last month on lower estimates for U.S. economic growth.