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Oil spikes on rumors of Russian oil cuts

OIL prices spiked 11 percent yesterday as rumors swirled that Russia, which vies with Saudi Arabia as the world's largest oil producer, would join OPEC in slashing crude production.

Benchmark crude for April delivery jumped US$4.70 to settle at US$47.03 a barrel on the New York Mercantile Exchange. In London, Brent prices gained US$3.69 to settle at US$44.88 on the ICE Futures exchange.

Analyst and trader Stephen Schork said investors latched onto reports that Russian Vice Premier Igor Sechin would attend an OPEC meeting Sunday in Vienna. Russia has previously flirted with OPEC, and investors snapped up crude stocks on the expectation that it would help the group cut oil production to balance weakening global demand.

"There's just a bunch of guessing right now," analyst and trader Stephen Schork said. "A lot of people think it's time for commodities to start rallying."

While Russia can provide an enormous amount of crude each year, the amount it has produced has been down.

"Their production has been falling anyway because they haven't invested the type of money they need to keep production levels rising," analyst Phil Flynn said.

Vice-Premier Igor Sechin said Russia supports the idea of cutting oil supplies because of a significant surplus, Russian news agencies reported.

Sechin told President Dmitry Medvedev that according to OPEC, the surplus on the market is sufficient to last as long as 63 days, state-run ITAR-Tass reported.

"This volume puts pressure on market indicators and leads to lower prices," Sechin said.

Sechin said coordination between OPEC and other major producers including Russia has stabilized prices at around US$40 per barrel.

Sechin also said he would participate in the OPEC summit in Vienna and report to Medvedev on its results, state-run RIA-Novosti reported.

Oil traders and brokers have scrambled this week to predict which way the market will turn. A rise in crude prices last week led many analysts to believe that oil had finally bottomed out.

But prices plunged 7 percent Wednesday on signs that supply cuts have not caught up with the severe erosion in energy demand, which this year has left the world swimming in surplus oil.

"Every time the market starts to run higher, the rug gets pulled out from underneath," Cameron Hanover analyst Peter Beutel said. "We see a wave of bargain hunting, or the dollar gets weak, or there's problems in Nigeria" that could affect production.

Beutel said many investors have parked their money elsewhere this week in anticipation of the release Friday of demand expectations by OPEC and by the International Energy Agency in Paris.

At its meeting Sunday, OPEC members will decide if another production cut, on top of the 4.2 million barrels per day already announced, is needed to stabilize oil prices.

"There's so many questions right now," Beutel said.

The Organization of Petroleum Exporting Countries has sent mixed messages about whether it will cut production again, or focus more on making sure member states are complying with reductions that have already been announced.

OPEC has long suffered a credibility problem, with some countries cheating on production limits when their budgets get squeezed.

After six months of cutting supplies, OPEC countries haven't reached their targeted production levels, according to a survey by Platts released late Wednesday. The Platts survey found that OPEC drew 28.1 billion barrels a day in February, suggesting that it's trimmed only 80 percent of its targeted cut.

Saudi Arabia said recently that it would focus on enforcing those production levels agreed to last year.

Energy Secretary Steven Chu will try to persuade OPEC ministers to avoid squeezing oil supplies more than they already have. Tighter supplies might boost revenues for oil producers, but it could also extend the global recession and the pain now being felt by countries that rely on oil for revenue.

The government reported yesterday that retail sales fell in February for the seventh time in the past eight months.

The Labor Department reported that first-time requests for unemployment insurance rose to 654,000 from the previous week's upwardly revised figure of 645,000, above analysts' expectations.

The number of people receiving benefits for more than a week increased by 193,000 to 5.3 million, the most on records dating back to 1967. That's the sixth time in the past seven weeks that the jobless claims rolls have set a record high.

The Energy Department's Energy Information Administration said yesterday that U.S. stores of natural gas fell more than expected last week, however. The government reported that seasonal demand continued to rise, though it remains far below historical norms.

In other Nymex trading, gasoline for April delivery jumped 9.45 cents to settle at US$1.33457 a gallon, while heating oil gained 9.3 cents to settle at US$1.2264 a gallon. Natural gas for April delivery rose 19.7 cents to settle at US$3.995 per 1,000 cubic feet.


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