Crude spikes after inventory increase

NEW YORK - Crude oil futures rose sharply Wednesday as the U.S. Department of Energy reported a rise in crude inventories but a drop in the supply of distillate fuel. Tensions in the Middle East and an OPEC forecast for rising demand contributed to the price rise.

Light sweet crude for March delivery rose $1.07 to settle at $48.33 a barrel on the New York Mercantile Exchange after sinking as low as $46.95 shortly after the inventory reports. March heating oil settled up 5.07 cents at $1.3420 a gallon.

Brent crude for April delivery rose 76 cents to settle at $46.15 a barrel on the International Petroleum Exchange.

Prices rallied amid concern about low distillate inventories, geopolitical tension in the Middle East and high oil demand, said Phil Flynn, an analyst at Alaron Trading Corp. in Chicago.

"The big picture: demand is going through the roof," Flynn said.

The market was jittery Wednesday after OPEC predicted increased oil demand, and following reports of an explosion near an Iranian nuclear facility. State-run media gave conflicting explanations for what happened in Iran, including blasting for dam construction, a fuel tank dropping from an Iranian plane and friendly fire.

Later Wednesday, the U.S. Department of Energy reported that the nation's inventory of crude oil climbed 2.1 million barrels last week to 296.4 million barrels, or 8.5 percent above year ago levels.

The U.S. supply of gasoline rose 4.9 million barrels to 221.7 million barrels, or 7.4 percent below year ago levels. The supply of distillate fuel, which includes heating oil, diesel and jet fuel, fell 3.1 million barrels to 112.5 million barrels, or 5.1 percent below year ago levels. The supply of high-sulfur distillates used for heating oil fell 2.4 million barrels to 40.8 million barrels, down 9.3 percent from a year ago.

Ed Silliere, vice president of risk management at Energy Merchant LLC in New York, said most analysts were anticipating a much smaller increase in gasoline inventories. "That puts gasoline in a very vulnerable position," he said.

In Nymex trading, March gasoline futures settled up 2.56 cents at $1.2820 per gallon, while March natural gas futures slipped 6.5 cents to settle at $6.110 per 1,000 cubic feet.

OPEC, in its monthly oil market report, predicted an increase of 110,000 barrels a day in demand for its oil this year. It attributed the trend to continued world economic strength and projected disappointing output from non-OPEC producers.

Oil prices have held within a $45-$50 per barrel range since early January, but have been inching upward for more than a week on worries that OPEC might cut production at its March 16 meeting in Isfahan, Iran. OPEC acting Secretary-General Adnan Shihab Eldin has said the group may cut up to 1 million barrels a day.

However, Nigeria's top energy adviser, Edmund Daukoru, said Tuesday that the cartel would not need a hefty production cut to defend oil prices. Fellow OPEC member Algeria has also suggested no major reductions were needed.

Qatar's Minister of Energy and Industry, Abdullah bin Hamad al-Attiyah, acknowledged debate within OPEC, telling Dow Jones Newswires, "We've two options: either to keep oil production as it is, or to cut it."

Deborah White of SG Securities in Paris said Eldin's comments had to be taken in context, pointing out that he also said any cuts might be relatively minor and in line with expectations of lessened demand as winter ends.

Eldin said "they might need to cut (only) half a million barrels a day," White said.

She alluded to market hesitation as winter draws to an end and driving season begins, saying, "Heating oil is no longer interesting, and it is too soon for gasoline to take over."

While Nymex crude oil prices remain about $8 lower than the all-time closing high of $55.17 set in late October, they are nearly 40 percent higher than a year ago.

Associated Press Writer Wee Sui-Lee in Singapore and George Jahn in Vienna, Austria, contributed to this story.