Oil prices rise on output drop

From Herald Sun (AU)

WORLD oil prices rose overnight as traders digested news that US refinery production fell last week as the peak-demand season for petrol kicks off.

Investors were also keeping a keen eye on a rogue cyclone in the crude-rich Middle Eastern region.

New York's main oil futures contract, light sweet crude for delivery in July, gained 35 cents to close at $US65.96 per barrel.

In London, Brent North Sea crude for July delivery added 57 cents to settle at $US71.02 per barrel.

The US Department of Energy (DoE) said in a weekly market update overnight that American inventories of motor fuel leapt by an unexpected 3.5 million barrels to 201.5 million barrels in the week to June 1, boosted by strong imports.

That was more than double analysts' consensus forecasts for a gain of 1.6 million.

Such an increase in petrol stock levels would be expected to put downward pressure on prices in normal market conditions, but dealers focused instead on news that refinery production had fallen.

"The larger-than-expected builds in product stocks are the clear bearish element of this week's numbers," said Citigroup analyst Tim Evans.

However, he said: "The bullish aspect - at least for the products - was the drop in the refinery utilisation rate, which will have to rebound sharply in order to sustain or increase current output levels."

Petrol statistics are a key focus for traders amid the US summer holiday driving season which puts peak demand on petrol supplies.

The DoE said that US crude oil reserves advanced by 100,000 barrels to 342.3 million barrels last week. Analysts had pencilled in an increase of 250,000 barrels.

Eric Wittenauer, of AG Edwards, said although the report was "bearish" he expected a stronger refinery output in next week's report.

"But crude went up on the questions that remain with the Cyclone Gonu and also after the information that several thousand Turkish troops had crossed into northern Iraq to chase Kurdish guerrillas," he said.

Media reports of the infiltration were denied by Turkey, then by the United States.

Oil prices found support as Cyclone Gonu lashed Oman overnight, forcing the evacuation of thousands of people in the Gulf state and neighboring Iran in the strongest tropical storm in the region in 30 years.

Oil experts said any impact on world oil prices would be temporary, provided that energy facilities in the area remained intact.

"If shipping is halted through (Strait of) Hormuz, I think there is going to be a panic in world oil markets and prices could shoot to as high as $US80, but of course for a very short period," Kuwaiti oil expert Kamel al-Harami said.

A majority of oil exports from OPEC kingpin Saudi Arabia and Iraq, as well as all exports from Iran, Kuwait, the United Arab Emirates and Qatar pass through the strait.

However OPEC powerhouse Saudi Arabia, which lies west of Oman, said it did not expect the storm to affect the country's oil-producing regions.