U.S. to suspend oil reserve shipments

Crude still closes at new record as Saudis shut down Bush and Goldman Sachs predicts much higher prices.

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By Steve Hargreaves and Kenneth Musante, CNNMoney.com staff writers

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NEW YORK (CNNMoney.com) -- The government said Friday that it would halt deliveries to the strategic oil reserves in July, a move many lawmakers have been calling for in an attempt to boost oil supplies and bring down gas prices.

Oil prices eased a bit from pervious highs, but still settled at a new closing record of $126.29 a barrel as Saudi Arabia rejected a plea from President Bush to boost production and Goldman Sachs revised their price outlook sharply higher.

The U.S. Energy Department announcement comes several days after Congress voted to direct the Bush administration to stop the shipment of oil to the emergency reserves.

The Energy Department decided not to purchase oil for the reserve from July to December in case the bill becomes law, said Megan Barnett, a spokeswoman for the department.

The Strategic Petroleum Reserve, located underground at four sites in the salt caverns bordering the Gulf of Mexico, was built in the 1970s after the first oil embargo to protect the country against a sudden drop in oil supplies.

The Bush administration has been filling the reserve since 2001, boosting the reserve from about 540 million barrels to 702.7 million, enough to protect against a disruption in imports for about 58 days, said Barnett.

Barnett remained skeptical of the halt's effect, saying deliveries to the strategic reserve accounts for "less than one tenth of one percent" of the oil on the market.

"The amount of oil put in the SPR last week... we trade that in less than one minute," said Tom Kloza, the Oil Price Information Service's chief oil analyst.

But supporters say halting shipment to the reserve could bring down gas prices by as much as 24 cents a gallon.

Saudi Arabia rebuffs Bush: Earlier on Friday, oil had risen more than $3 a barrel as Saudi Arabia rejected President Bush's call to increase production, saying there wasn't enough demand from its customers.

Bush met with Saudi Arabia's King Abdullah on Friday as part of his Middle East tour to appeal for greater production to help quell crippling fuel prices.

According to the Associated Press, Saudi oil minister, Ali al-Naimi, said the kingdom decided on May 10 to raise production by 300,000 barrels, at the request of customers, and that increase was sufficient.

"Supply and demand are in balance today," he told a news conference. "How much does Saudi Arabia need to do to satisfy people who are questioning our oil practices and policies?"

Some analysts have attributed the recent surge in oil prices to fears about future oil supplies, not a current supply shortage. They say there won't be enough oil in a few years to satisfy soaring worldwide demand.

Crude began to rise early Friday after traders foresaw a jump in diesel fuel use following the earthquake in China and Goldman Sachs revised its price outlook sharply higher.

Oil prices: U.S. crude for June delivery rose $2.17 a barrel to settle at $126.29 a barrel on the New York Mercantile Exchange, a new closing record. That topped the previous closing record of $125.96, set May 9.

Crude also hit a new intraday record of $127.82, topping the previous intraday record of $126.98 set May 14.

"Everything the market looks at is bullish," Peter Beutel, an oil analyst at Cameron Hanover, wrote in a research note Friday.

Also pushing up prices Friday were fears of higher demand from China. Traders fear that the rebuilding after the 7.9 magnitude earthquake that rocked southwest China Monday - and killed more than 20,000 people with tens of thousands of others still missing - will lead to a sharp increase in diesel fuel use, the Associated Press reported.

Rocketing fuel: Diesel fuel has been in tight supply for the past several months following a cold winter in the Northern Hemisphere, and as the popularity of diesel cars grows in Europe and the developing world.

With diesel prices outpacing gasoline, refiners in the United States have been ramping up production of diesel and sending it abroad. That has displaced some domestic gasoline production, helping push gas prices higher.

The price of diesel fuel hit a new record high Friday of $4.482 a gallon, according to a daily survey from AAA. Regular unleaded gasoline also reached a new record of $3.787 a gallon.

Goldman Sachs weighs in: Also contributing to Friday's oil price spike: analysts at the investment bank Goldman Sachs boosted their oil price predictions for the second half of the year from $107 to $141 a barrel.

"Supply constraints continue to push crude prices higher," Goldman analysts wrote in a research note Friday.

But the bank noted that despite the high prices, the global economy - and by implication, the demand for oil - continues to grow.

"The dire macroeconomic impact from the current oil shock has yet to materialize," the note said.  To top of page

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