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Crude continues to buck traditional market basics

OIL prices appeared again to buck traditional market fundamentals, rising for the third straight day yesterday despite a huge surplus and weak global demand.

Concerns that the US bank bailout will spark a wave of inflation sent money flowing into hard assets like oil.

Benchmark crude for June delivery jumped US$1.93 to settle at US$51.55 a barrel on the New York Mercantile Exchange. In London, Brent prices rose US$1.56 to settle at US$51.67 a barrel on the ICE Futures exchange.

"It's surprised a lot of people that oil is hanging around US$50 and not US$40" a barrel, said Andrew Lebow, senior vice president and broke at MF Global.

Trader and analyst Stephen Schork suggested there was little reason for even small upward price movements, considering the sorry state of the world's economy. The government reported this week that the US petroleum appetite is the lowest in a decade and oil inventories are now bloated with the biggest surplus in nearly 19 years.

"We do not have a thoughtful explanation as to why crude oil moved higher," Schork said in his Schork Report, "other than, there were more buyers than sellers."

Equities markets also moved higher yesterday, which recently has propped up oil prices. Investors look to equities for signs that the economy is recovering, and they tend to pump money into commodities when the stock market rises.

The Dow Jones industrials average rose 1.7 percent and the Standard & Poor's 500 index rose 1.9 percent in late afternoon trading.

Natural gas futures, some say, give a better idea of what is happening in the economy.

In a break for consumers, natural gas prices fell again after dropping Thursday to the lowest price in more than six years. Yesterday, natural gas for May delivery slipped 11.2 cents to settle at US$3.297 per 1,000 cubic feet.

Natural gas, which is a major power source for electrical utilities, has been building up in storage at levels well above seasonal averages as manufacturers cut back on production. The Energy Information Administration reported Thursday that natural gas in US storage is now 36 percent greater than it was at this time last year.

Yesterday, American Electric Power blamed tepid electricity demand for a 37 percent drop in its first quarter earnings. The Columbus, Ohio, based power company said yesterday that electricity use by industrial customers in its region fell 15 percent.

That falling demand can also be seen clearly in recent unemployment figures, with energy intense industries like manufacturing hit particularly hard.

The three major US automakers have slowed down production this year to match a plunge in demand.

General Motors said Thursday it would shutter 13 assembly plants for up to 11 weeks this summer. That will disrupt the lives of nearly 24,000 workers.

Ford Motor Co. also has cut back on manufacturing this year.

Oil producers have been busy slashing crude exports in hopes of draining the global oil reserves and boosting prices.

On May 28, the Organization of Petroleum Exporting Countries is expected to consider another output reduction on top of the 4.2 million barrels a day it pledged to cut last year.

Deutsche Bank analyst Adam Sieminski said yesterday in a research note that OPEC, which controls about 40 percent of global crude supplies, needs to slow its operations even more "to provide a more solid foundation to the oil price."

But there was evidence that some members of OPEC, pummeled by low prices, have begun to break quota agreements. Oil Movements, which tracks oil shipments at sea, said this week that OPEC compliance with quotas has stalled.

As global demand continues to sputter, companies continue to pump huge volumes of crude onto idle supertankers, effectively taking millions of barrels out of circulation. The goal is to bring that oil ashore once prices rise.

Oil Movements noted this week that tanker companies are reserving more space to store oil on top of the 100 million barrels that analyst say are already floating around at sea.

"Because the sellers can't find a bid for oil that they like, they'd rather just store it," said Andrew Lipow, president of Lipow Oil Associates.

Shipping lanes started to fill with idle tankers earlier this year when oil prices plummeted below US$35 a barrel. Crude prices have stabilized around US$50 a barrel, but Lipow said it still makes sense to store it.

Tanker companies have cut their rates during the past several months as OPEC exports less, and a number of new supertankers take to the seas, he said.

In other Nymex trading, gasoline for May delivery increased 4.76 cents to settle at US$1.442 a gallon. Heating oil also rose 5.04 cents to settle at US$1.3683 a gallon.


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