Oil Prices Soar On Supply Concerns

In this undated photo released by Mexico's National Oil Company, PEMEX on June 13, 2006, a boat nears an offshore oil rig in the gulf of Mexico near the coast of Campeche, Mexico. Monday, the Senate is expected to vote whether to expand oil and gas development in the central Gulf, opening for drilling 8.3 million acres now off limits.
Oil prices soared nearly $2 a barrel Tuesday on expectations of further declines in U.S. crude oil stocks, fueling concerns that supplies may be inadequate heading into winter in the Northern Hemisphere.

Light, sweet crude for December delivery rose $1.77 to $95.75 a barrel in electronic trading on the New York Mercantile Exchange by midday in Europe.

December Brent crude added $1.80 to $92.29 a barrel on the ICE Futures exchange.

Market participants expect the U.S. Energy Department to report Wednesday that oil inventories fell last week, in part because of a suspension of output at Mexico's state oil company Petroleos Mexicanos, a major crude exporter to the United States.

Last week, crude futures jumped more than $4 after figures showed a sharp, unexpected drop in U.S. crude inventories for the second week in a row.

"The oil market is really supported by the tight inventories in the U.S. market and the general expectations for the inventory report this week are that the crude inventories will likely fall," said Victor Shum of Purvin & Gertz in Singapore.

Analysts think some traders and investors will try to push oil prices to the psychologically important $100 level this week. Crude prices are within the range of inflation-adjusted highs set in early 1980. Depending on the how the adjustment is calculated, $38 a barrel then would be worth $96 to $103 or more today.

"The market remains bullish and seems to be on an upward trend to hit the psychologically important $100 level. While it is on the uptrend there is a tremendous amount of volatility," Shum said. "It's not unusual to see prices change in a range of $2 in a day."

Gasoline prices, meanwhile, are back over $3 a gallon. The Energy Department reported Monday that gas rose 14 cents in the past week to a nationwide average of $3.01 a gallon. That's an increase of 25 cents in the past three weeks, and the first time it's been over $3 since mid-July.

The spike may seem sudden, but gas prices are finally playing catch up with soaring crude prices, reported CBS News correspondent Anthony Mason.

While $3 a gallon gas is back, it's still well short of the all time high - $3.22 set this past May.

But that could be tested soon, Mason said, with crude rising relentlessly for the past month at the New York Mercantile Exchange and now threatening to crack $100 a barrel.

"The consumer has been relatively isolated from these prices," said Amanda Kurzendoerfer, commodities analyst at Summit Energy Services Inc. in Louisville, Ky.

But, she said, if oil prices don't retreat, gas prices could reach $3.50 or $4 a gallon by next summer.

Crude stocks are expected to fall by 1.6 million barrels, according to the average forecast in a Dow Jones Newswires survey of energy analysts. Gasoline inventories are expected to increase by 200,000 barrels, while distillates, which include heating oil and diesel fuel, are likely to have fallen 500,000 barrels, the survey showed.

"With the disruption to Mexican crude oil exports, it's to be expected that U.S. crude imports will remain on the low side in tomorrow's DOE report and keep U.S. crude oil stocks under pressure," said Olivier Jakob at Petromatrix in Switzerland.

The Nymex crude contract had fallen $1.95 to settle at $93.98 a barrel Monday, weighed down by news of more Citigroup Inc. writedowns, the release of Turkish soldiers that had been captured by Kurdish militants and a drop in U.S. share prices.

Traders and analysts said the pullback was a result of funds and other speculators locking in recent gains, rather than a change in sentiment that could threaten the continuation of crude's 15 percent run-up in the past month.

Heating oil futures added 4.41 cents to $2.5880 a gallon on the Nymex, while gasoline prices gained 3.89 cents to $2.4200 a gallon.

Natural gas futures lost 2.2 cents to $7.977 per 1,000 cubic feet.