Oil hits record despite supply growth

The government reported today on the supply of crude oil, gasoline and distillates.

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NEW YORK (CNNMoney.com) -- Oil prices touched another record Wednesday, spiking after an initial decline on a government report that said crude and gasoline supplies were stronger than expected last week.

Light sweet crude for June delivery settled at a record high of $123.53 a barrel, up $1.69 from the previous record of $121.84 a barrel set Tuesday.

The contract reached a record trading high of $123.80 at one point during the session.

Just before the Energy Information Administration released its report, oil was up 21 cents at $122.05, then retreated as low as $120.54 before rebounding.

Crude prices for the June contract dropped off as investors reacted to the positive supply report. However, they spiked back up again as the "market realized that the numbers are not as bullish as people thought and they bought back really quickly," said Stephen Schork, publisher of the industry newsletter The Schork Report.

After any event or report, the markets need at least 20 minutes to digest the information, according to Schork.

The numbers

Crude oil inventories climbed by 5.7 million barrels from the week ended May 2. Analysts forecast a gain of 1.5 million barrels, according to a survey from Platts, an energy research firm.

At 325.6 million barrels, U.S. crude oil inventories are in the middle of the average range for this time of year.

Total motor gasoline inventories rose by 800,000 barrels last week, and are in the upper half of the average range. Gasoline inventories were expected to fall 500,000 barrels.

Distillate fuel - used to make heating oil and diesel fuel - dropped by 100,000 barrels last week, and are in the lower half of the average range for this time of year. The research firm reported that distillates were expected to rise by 1.3 million barrels.

Refineries functioned at 85% of their operational capacity in the week ended May 2, a slight decline from the previous week. This is less than the usual 90% capacity for this time of year.

Crude oil so high, there is no incentive to make gas

Crude oil prices have been running up on supply disruptions in Nigeria, a key supplier of oil for the United States. Royal Dutch Shell PLC (RDS.A) said militants struck a facility owned by one of the company's joint ventures in Nigeria.

Another reason that crude oil prices have been so high is the volatile weather in the Gulf of Mexico.

"We have had a very odd season with the Gulf of Mexico, and we have had off-and-on-again shipping," said Schork.

He said oil supply levels are dependent on imports reaching their destination, and that has been hampered by thick fog in the Gulf of Mexico.

The weakening dollar has also been pushing up the price of oil. As the value of the dollar falls, oil becomes more expensive because it is traded in U.S. dollars all over the world.

According to auto group AAA's Web site Wednesday, the average price for a gallon of regular unleaded gasoline rose Wednesday to $3.618, up eight-tenths of a cent from the previous day. It is just a half-cent below the record high of $3.623 set May 1.

Even though retail gas prices are at close to record levels, the tremendously high price of crude oil has given refineries little motivation to make gasoline out of crude oil.

With wholesale gasoline prices at about $128 a barrel, that is $8 or $9 a barrel premium after paying for crude at recent prices, according to Schork. He compared that yield to the same time last year, when crude was roughly $65 a barrel and gas was $100 a barrel, yielding a $35 premium.

"That is a very small yield," said Schork. "The incentive is not there."

Gas is not profitable, and the machines that refine crude oil into retail gasoline are fatiguing, said Schork. Even if a refiner had economic incentive to make gasoline, refineries simply can't maximize output.

Looking forward

On Tuesday, the Energy Information Administration - in its monthly short-term energy outlook - said it expects higher crude prices, which will lead to higher prices for gasoline and diesel fuel.

The report said "the oil supply system continues to operate at near capacity and remains vulnerable to both actual and perceived supply disruptions."

The EIA also indicated that while world oil consumption is projected to grow in 2008, U.S. consumption will decline "as a result of the economic slowdown and high petroleum prices."