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Oil prices rally again despite massive supply

OIL prices continued to rise yesterday and climbed above US$58 a barrel for the first time in nearly six months as the U.S. economy showed some signs of recovery. Still, oil analysts continue to search for fundamental reasons as to why energy prices have risen to current levels.

Upbeat employment and retail news aside, energy consumption remains anemic and most experts say it will be some time before there's a rebound, save for an uptick in summer driving.

Benchmark crude for June delivery rose 37 cents a barrel to settle at US$56.71 in trading on the New York Mercantile Exchange. Earlier in the session, the contract reached a high of US$58.57.

In London, Brent prices rose 32 cents to settle at US$56.47 a barrel on the ICE Futures exchange.

"We have events coming together that can drive energy prices higher in spite of the plush supplies we have," Phil Flynn, an analyst at Alaron Trading Corp., wrote in a client note yesterday. "We have a market that's fixated on the prospects of a much-faster-than-expected global economic recovery."

For U.S. consumers, a resurgence of money in crude and gasoline markets has meant a jump in what they pay at the pump - and that increase has been pronounced in the past week.

The average national retail price for a gallon of unleaded rose more than 3 cents overnight - the second 3-cent jump in as many days - to US$2.141 a gallon, according to auto club AAA, the Oil Price Information Service and Wright Express. That's nearly 10 cents higher than the price just a week ago but still US$1.47 a gallon below year-ago levels.

Experts say gasoline is likely to continue ticking upward as the summer driving period approaches, but no one predicts the extraordinary prices that topped US$4 a gallon last summer.

Earlier this week the Energy Department released data that showed unused crude in storage far exceeded norms for this time of year and that demand was way off. One reason is that heavy industry and manufacturers, among the biggest consumers of energy, continue to struggle.

General Motors Corp. on yesterday reported a US$6 billion first-quarter loss and chemical maker DuPont Co. said it was eliminating 2,000 more jobs as both companies adjust to falling sales.

But there are signs of an improving economy. A host of retailers, including Wal-Mart Stores Inc., reported better-than-expected April sales yesterday, and new applications for jobless benefits fell to the lowest level in 14 weeks, signaling a wave of layoffs may have peaked.

Still, the number of unemployed workers getting benefits climbed to a new record.

Even though crude-storage levels continue to rise, the government reported Wednesday they climbed less than expected last week. That apparently was reason enough for some to start buying oil.

"The overwhelming sense in the market is that the economy is improving and that traders and hedge funds don't want to miss out on buying at relatively low levels," Tom Pawlicki of MF Global Research said in a report yesterday. "This sentiment suggests that fundamental factors will continue to be cast to the side."

Production cuts by the Organization of Petroleum Exporting Countries have helped bolster crude prices, and the cartel next meets May 28 to discuss further possible output reductions. OPEC leaders have said they need oil prices to get to US$70 a barrel, or they may be forced to cut back on production because of the costs involved.

"For most of OPEC, including Saudi Arabia, US$50 a barrel is enough to break even on government budgets," said Francisco Blanch, head of global commodity research at Bank of America Merrill Lynch. "So I don't think the US$70 a barrel number that OPEC is talking about is necessarily a benchmark, it's just something they would like."

Adding to downward pressure on energy prices were results of the so-called government stress tests for major banks, which were leaked prematurely yesterday. Regulators have apparently told banks including Wells Fargo & Co. and Citigroup Inc. that they need to raise billions.

In other Nymex trading, gasoline for June delivery rose 3.75 cents to settle at US$1.6655 a gallon and heating oil gained 1.4 cents to settle at US$1.4852 a gallon. Natural gas for June delivery rose 9.4 cents to settle at US$4.081 per 1,000 cubic feet.


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