Oil futures prices bolted 5 percent higher Wednesday, climbing above $44 a barrel after government data showed a slight decline in U.S. supplies of crude and heating oil as colder weather descended on the northeastern United States, driving up fuel demand.
With winter less than a week away in the Northern Hemisphere, traders focused on the tight supply of heating oil and sent crude futures $2.33 higher to $44.15 per barrel on the New York Mercantile Exchange. Heating oil futures spiked 7.25 cents to $1.377 per gallon.
"The weather's getting colder and inventories are still low," said Tom Bentz, a broker at BNP Paribas Commodity Futures in New York. "So, you're getting a recovery" in oil prices, which are down significantly from the late October high above $55 a barrel.
Inventories of crude oil in the United States are 6 percent above year ago levels even though the Energy Department reported Wednesday that supplies fell by 100,000 barrels last week to 293.8 million barrels.
However, the nation's supply of distillate fuel, which includes heating oil and diesel, is 12 percent below year ago levels, unchanged from a week ago at 119.3 million barrels. High-sulfur distillates typically used for heating oil declined by 100,000 barrels to 49.9 million barrels, or 13 percent lower than a year ago.
Carl Larry, associate director of energy futures at Barclays Capital in New York, said it is unlikely that distillate fuel stocks will grow in the weeks ahead, assuming normal winter weather patterns prevail. Distillate fuel demand has already been 7 percent higher than a year ago over the past four weeks due to rising consumption of diesel and jet fuel, Larry said.
Another "eyebrow raising" detail in the Energy Department report was data showing strong demand for gasoline despite high pump prices. Daily gasoline demand averaged 9.1 million barrels over the past four weeks, up 2 percent from a year ago.
January gasoline futures climbed 5.71 cents to $1.67 per gallon on Nymex. The average retail price of gasoline last week was $1.85 per gallon.
Wednesday's rally in energy prices may also have been influenced by expectations that, as colder weather drives up home-heating demand in the United States this week, the government's next supply report could show even steeper drops in heating oil inventories.
Traders "are building into the price an expectation of a decline next week," said Ed Silliere, vice president of technical research at Energy Merchant Corp. in New York.
Previously rising U.S. inventories of crude oil and distillate fuel had been a factor in lowering crude futures by about $13 per barrel from the record closing high of $55.17 in late October.
In an effort to prevent further declines in the price of oil, particularly next spring when a seasonal dropoff in demand is expected, the Organization of Petroleum Exporting Countries agreed to rein in its production by 1 million barrels a day beginning next month.
Bentz said OPEC's decision may have helped prices from falling below $40 a barrel, setting the stage for this week's move higher.
"Until the inventories can be replenished, there's still potential for the market to recover on the back of the heating oil strength," Bentz said.
Energy markets have been jittery all year over potential production disruptions in key producers Nigeria, Russia, Venezuela, Saudi Arabia and Iraq.
Iraq said it would deploy more troops to guard oil pipelines where saboteurs looking to disrupt supplies struck 27 times in November. Elsewhere, embattled Russian oil giant Yukos filed for bankruptcy in the United States in an eleventh-hour attempt to stop the weekend auction of its main subsidiary.
"All those issues that were there three months ago when we were at $55 a barrel are still there," Bentz said.
But Peter Gignoux, a London-based oil adviser for GDP associates, said these factors are not having as much impact.
"The Yukos impact isn't going to be felt on the futures market in New York, and the market is (also) pretty much desensitized to any interruption of Iraqi export oil," he said.
Associated Press Writers Yeoh En-Lai in Singapore and George Jahn in Vienna, Austria, contributed to this report.