Oil Prices: Calm Before Storm

A new record decline to $US112 per barrel showed crude oil futures after a weekly US government inventory report reflected an unexpected decline in inventories. Gasoline futures also climbed on a drawdown in stocks.

Thoroughly watched by the market, the US Energy Information Administration's inventory report showed crude stocks declined by 3.2 million barrels last week. Analysts surveyed by Dow Jones Newswires expected, on average, a 2.4-million-barrel-increase.

The inventory slide sent light, sweet crude for delivery in May up $US2.37 to come at a record $US110.87 a barrel on the New York Mercantile Exchange after an earlier jump at $US112.21. That beat a trading record of $US111.80 set last month.

The EIA also said gasoline and distillate supplies - which include diesel fuel and heating oil - fell more than expected last week.

May gasoline futures rose 2.38 cents to settle at $US2.7742 a gallon on the Nymex - a level that approaches the record futures price of $US2.925 per gallon set in 2005 when Hurricane Katrina struck New Orleans.

The national average price of a gallon of regular unleaded gas rose 1.2 cents to a record $US3.343 a gallon, according to a survey of gas stations by AAA and the Oil Price Information Service. With the peak of summer driving still to come and gas also following crude higher, the fuel may well reach the retail price of $US4 a gallon that the Energy Department said was a possibility.

Analysts expect demand for gasoline and oil to fall further as prices rise. Theoretically, that should bring prices down. But so far this year, prices have shown little inclination to fall in response to eroding demand. With gasoline supplies shrinking and the summer approaching - when demand, while weaker than last year, will be stronger than it is now - consumers may have to wait until this fall for price relief.

Analysts attribute much of oil's rise this year to speculative buying tied to the falling dollar. With the Federal Reserve expected to cut rates several more times this year, which will likely further weaken the dollar, oil prices may continue rising despite tepid demand.