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Oil rises after decline in crude supplies

OIL prices moved higher for a third straight day yesterday after a report showed that U.S. crude inventories decreased more than expected last week.

Oil also got support from a weaker U.S. dollar, OPEC's decision to maintain production levels and a new report that says the slump in global oil demand will not be as bad as initially feared.

Benchmark crude for October delivery rose 63 cents to settle at US$71.94 a barrel on the New York Mercantile Exchange. Earlier in the day, the contract rose as high as US$72.44. On Wednesday, the contract rose 21 cents.

The Energy Information Administration reported that crude inventories fell by 5.9 million barrels for the week ended Friday, more than three times estimates of analysts surveyed by Platt's, the energy information arm of McGraw-Hill Cos.

The government also said stocks of gasoline and distillates used for diesel fuel and heating oil rose for the week as supplies of crude products over the last four weeks increased by 2 percent from a year ago when Hurricane Gustav battered Louisiana. Supplies of crude products remain ample.

PFGBest analyst Phil Flynn said the decline in crude supplies shows that refiners were boosting production ahead of Labor Day, which marks the end of the summer driving season.

"The question is whether the demand is going to be enough to meet the supply," he said.

Natural gas prices jumped late in the session to settle 42.7 cents higher, or 15 percent, at US$3.256 per 1,000 cubic feet. Gas prices, down about 80 percent in the past year, got a boost from an Energy Department report that showed natural gas stockpiles rose less than expected last week.

But oil analyst and trader Stephen Schork credited the increase to speculators covering their bets that natural gas prices would continue to fall as opposed to an increase in demand.

Crude has jumped from US$68 a barrel in two days as the dollar weakened to its lowest level this year. Because crude is priced in the U.S. currency, it becomes cheaper when the dollar falls. Some investors also use commodities like oil and gold as a hedge against inflation and dollar weakness.

The Organization of Petroleum Exporting Countries, responsible for about 40 percent of the world's oil production, confirmed yesterday at its meeting in Vienna that it will keep crude production levels the same.

OPEC said in a statement that "market fundamentals have remained weak" and that "whilst there are signs that economic recovery is under way, there remains great concern about the magnitude and pace of this recovery," especially in the West.

Meanwhile in Paris, the International Energy Agency said the slump in global oil demand in 2009 will be less severe than previously forecast and predicted consumption would rise in 2010 as the world economy stabilizes.

The IEA said yesterday that crude demand will reach 84.4 million barrels a day this year, down 2.2 percent from 2008 levels, but better than the 2.7 percent decline the agency forecast previously. The IEA also raised its forecast for oil demand in 2010 to 85.7 million barrels a day, or half a million barrels a day more than its previous forecast.

In other Nymex trading, gasoline for October delivery was down 2.45 cents to US$1.8036 a gallon, and heating oil fell 0.55 cents to US$1.7855 a gallon.

In London, Brent crude settled 42 cents higher at US$70.25 on the ICE Futures exchange.


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