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Oil rises above US$45 as inventories fall

OIL prices jumped 9 percent yesterday as global stock markets rallied and the U.S. government reported crude levels in America's storage houses unexpectedly shrank.

Benchmark crude for April delivery rose US$3.73 a barrel to US$45.38 on the New York Mercantile Exchange, its highest close in six weeks. Oil prices shot up as high as US$45.76 a barrel earlier in the day.

The Energy Department's Energy Information Administration said crude inventories dropped by 700,000 barrels, or 0.2 percent, to 350.6 million barrels, for the week ended Feb. 27. Analysts had expected a boost of 2.2 million barrels, according to a survey by Platts, the energy information arm of McGraw-Hill Cos.

Crude inventories have been bloated for months, and a one-week drop won't signal a sustained rally in oil prices, said Tom Kloza, publisher and chief oil analyst at Oil Price Information Service.

"It's going to be a shaky year. The fundamentals are still poor," Kloza said. "Oil prices won't move higher without some signs that the economic malaise has bottomed out."

There was little indication of that yesterday, as retailer Costco Wholesale Corp. said its fiscal second-quarter profit fell 27 percent on weaker sales. Costco said it needed heavy discounts to move its merchandise during a sluggish holiday season.

And the Institute for Supply Management, a Tempe, Arizona-based trade group of purchasing executives, said the services sector shrank in February for the fifth straight month. The institute's service index fell to 41.6 last month from 42.9 in January. Any reading below 50 indicates contraction.

Meanwhile, BJ's Wholesale Club Inc., the third-largest warehouse club chain, reported a 5 percent increase in fourth-quarter profit as shoppers turned to its membership clubs for deals. The company said food sales jumped 11 percent in the quarter but sales of its nonfood items were flat.

Homebuilder Toll Brothers Inc. also said its fiscal first-quarter loss narrowed as it slashed expenses. But the company's revenue plummeted 51 percent as it sold fewer homes.

Crude prices rose earlier in the day on the coattails of news that China would try to revive its economy with another stimulus plan. Global stock markets also rallied as investors bought stocks at what were seen as bargain prices.

China's economy has had a major influence on crude prices. Last summer, traders bid crude prices up to US$147 a barrel on expectations that China and other developing nations would prop up global oil demand. But China's economy stumbled along with the U.S. and other trading partners, and oil prices dropped below US$34 a barrel in February.

Credit Suisse analysts said in a report yesterday that China's energy appetite shrank in January, with demand for diesel dropping 16 percent.

To counter its economic slump, China's national legislature is expected to focus on a 4 trillion yuan (US$586 billion) stimulus package and other measures when it opens its annual session today.

"We're getting good news out of China," said Mike Zarembski, senior commodity analyst at brokerage OptionsXpress Inc. "If the market recovers, it will start in the Far East and expand from there."

On Friday, the Labor Department will shed more light on the state of the U.S. economy when it releases unemployment figures for February. The ADP National Employment Report gave an early glimpse yesterday, showing private sector employment fell by 697,000 in February, a bigger drop than expected.

"Before we get too excited about finding a bottom for oil, we need to wait to see what happens with that Labor Department report," Zarembski said. "I want to see those numbers and see how the market reacts."

Investors are also looking for signals that OPEC may announce another production cut at the group's next meeting on March 15. The Organization of Petroleum Exporting Countries, which accounts for about 40 percent of global output, has announced 4.2 million barrels a day of production cuts since September in a bid to bolster prices.

Sucden Research in London said it expected OPEC to cut at least a further 500,000 barrels of daily output if prices remained near or below US$40 a barrel.

"If prices surge and are trading around the US$50 mark, then OPEC may be more hesitant to cut further amid the risk of putting further burden on an already fragile global economy," Sucden Research said.

Oil prices also were supported by news that a pipeline operated by a Royal Dutch Shell joint venture in Nigeria exploded. The company did not specify what caused the blast or whether it led to production cuts.

In other Nymex trading, gasoline for April delivery rose 6.22 cents to settle at US$1.3816 a gallon, while heating oil gained 3.49 cents to settle at US$1.2145 a gallon. Natural gas for April delivery rose 5.8 cents to settle at US$4.340 per 1,000 cubic feet.

In London, Brent prices added US$2.42 to settle at US$46.12 on the ICE Futures exchange.


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