Oil Hits New Record on Supply Concerns

Author: Dylan Sun

Oil prices rose to a new record settlement price Tuesday as traders turned their attention to a government inventory report expected to show tight supplies and shrugged off OPEC's decision to boost output.

Even factoring in OPEC's decision to increase oil production by 500,000barrels per day starting Nov. 1, "supplies are tight," said Addison Armstrong, an analyst at TFS Energy Futures LLC. And according to analyst predictions, they're going to get even tighter. Analysts surveyed by Dow Jones Newswires, on average, expect Wednesday's report from the Energy Department's Energy Information Administration will say that crude oil inventories fell by 2.7 million barrels in the week ended Sept. 7.

Investors had already priced in OPEC's increase, and many were looking for a larger production boost, analysts said. Light, sweet crude oil for October delivery rose 74 cents to settle at $78.23 a barrel on the New York Mercantile Exchange after alternating frequently between gains and losses. The settlement price bested the previous record, set July 31, by 2 cents. Oil's rise pulled October gasoline 0.25 cent higher to settle at $1.9811 a gallon after the contract spent much of the day in negative territory. In other Nymex trading, heating oil futures rose 1.11 cents to settle at $2.1827 a gallon, and October natural gas added 4.3 cents to settle at $5.934 per 1,000 cubic feet.

In London, October Brent crude oil rose 90 cents to settle at $76.38 a barrel on the ICE Futures exchange. OPEC, which produces about 40 percent of the world's oil, had long been expected to hold production levels steady at the meeting. But rumors started circulating on Monday that Saudi Arabia was campaigning to boost production. Many analysts think the Saudis are worried high oil prices will crimp demand for crude oil, which could hurt OPEC nations in the long run.

However, some analysts interpreted the fact that Tuesday's meeting lasted longer than expected as a sign the Saudis had a hard time persuading other OPEC nations to boost production. Tim Evans, an analyst at Citigroup Inc., thinks some OPEC members are worried demand for oil will slow in the fourth quarter, which combined with more supplies could mean sharply lower prices. Many OPEC countries already produce more oil than their quotas. But Omar Farouk Ibrahim, spokesman for the Organization of Petroleum Exporting Countries, said the announced increase would be based on the group's current production, not quotas ?a

Meaning the 12-nation cartel will be adding actual oil to the market. That translates into a quota increase of nearly 1.4 million barrels per day, Evans said. "This is a big number," Evans said, adding that it would take futures traders a while to digest its significance. "This is not something that the market's going to adjust to in a few minutes." At the pump, meanwhile, gas prices slid 0.5 cent overnight to a national average of $2.814 a gallon, according to AAA and the Oil Price Information Service. Retail prices, which typically lag the futures market, peaked at $3.227 in late May.

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