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Oil tumbles near $72 on supply rise
Crude backs off from near record highs as inventories post surprising gain; analysts say drop may be short-lived.
By Steve Hargreaves, staff writer

NEW YORK ( - Oil prices tumbled over $2 Wednesday, retreating from near-record highs, after a government report said gas and oil inventories rose unexpectedly.

U.S. light crude for June delivery fell $2.33, or over 3 percent, to settle at $72.28 a barrel on the New York Mercantile Exchange. Crude was trading down 16 cents just prior to the report, within striking distance of its all time trading high of $75.35 set April 21.

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In its weekly stockpile report, the Energy Information Administration said crude supplies rose by 1.7 million barrels, while closely watched gasoline inventories swelled by 2.1 million barrels. Analysts were looking for a 100,000 barrel decline in crude and a 700,000 barrel drop in gasoline supplies, according to Reuters.

Distillates, which are used to make diesel and heating fuel, fell by 1.1 million barrels. Analysts were looking for a 100,000 barrel decline.

"This isn't unusual for this time of year," said Brian Hicks, co-manager of the Global Resources Fund at U.S. Global Investors, speaking of the build in gasoline stocks. "But given the recent declines we've seen, it was a bit bearish."

Of equal importance this week was refinery production, which has been interrupted lately due to heavier-than-usual maintenance attributed to Hurricane Katrina.

EIA said refineries are now operating at 88.8 percent capacity, which is higher than analysts expected.

EIA also reported a strong build in blending stocks, which include the cleaner-burning ethanol. Gas prices are near record levels, partly on fears of an ethanol shortage as refiners switched to the corn-based additive from a chemical-based one suspected of causing cancer.

The motorist association AAA said Wednesday the nationwide price of gasoline averaged $2.917 a gallon, near its all time record price of $3.06 set in the wake of Hurricane Katrina.

Despite the encouraging numbers form EIA, Hicks said global political tensions and underlying supply and demand factors will still keep oil prices relatively high.

"I don't see a collapse," he said. "I think the trend is still bullish."

Oil prices, which are nearing the inflation-adjusted levels of around $80 a barrel in the early 1980s, have ebbed and flowed over the last couple of weeks.

Last week they fell around 5 percent, helped down by a drop in U.S. gasoline stocks that was less than expected and various proposals from lawmakers to ease gas prices, including ones by President Bush to cease filling the Strategic Petroleum Reserve and temporarily ease clean air standards.

Geopolitical worries

But prices shot up again this week, fueled by big investment fund buying and a continuously tense geopolitical climate, which is able to move prices far more than in the past because Saudi Arabia is pumping at full capacity and unable to boost production in the event of a crisis.

In the latest developments, Iran, which is locked in a conflict with the West over its nuclear program, said Tuesday that it would attack Israel if it was struck militarily by the U.S., raising the prospect of a broader conflict in the oil-rich Middle East.

Iran has refused to abide by a United Nations Security Council order to stop enriching uranium, which it says is for peaceful power generating purposes. Several nations, including the U.S., France and England, say it is intended to build a weapon.

On Tuesday Iran said it had increased its enrichment of uranium to 4.8 percent, close to the 5.0 percent compatible with civilian power stations.

The U.S., France and England are believed to be presenting the Security Council with options Wednesday to get Iran to comply with the order, options which could include sanctions or military strikes.

But any immediate action is unlikely since China and Russia, Security Council members with veto status, don't support sanctions against Iran. Iran has also said it would not use an oil embargo as a political weapon.

Still, oil traders are not reassured, and the prospect of confrontation with the country, the world's fifth largest oil producer, is helping keep prices high.

Other geopolitical concerns include Nigeria, where one quarter of the country's high-quality crude is shut in due to clashes with militants, who operate in an oil rich but impoverished area of the country and are demanding the oil wealth be spread more equitably.

And in Bolivia, the country's newly-elected left leaning president sent in troops to nationalize the country's oil and natural gas resources Monday.

Although Bolivia is a fairly minor player in the worldwide energy market and analysts don't expect it to be repeated elsewhere, they said it's part of a larger global trend for governments to demand more taxes and royalties from oil companies, which have posted record profits along with oil's record prices.

Although geopolitics garner the headlines, they are only one factor that has caused oil prices to triple over the last three years.

Big investment funds, chasing returns amid a lackluster Dow in 2005 and relatively low global interest rates, have invested heavily in all commodities.

And supply and demand remains a bedrock cause for price movement: Continued and growing oil use in the U.S. and a newfound thirst from China, India and other developing countries drives demand; the realization that new discoveries of large, high-quality, easily recoverable oil deposits are probably a thing of the past crimps supply.


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