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Oil Surges to 7wk High as Refinery Operation Gains

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Charles Randall
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Oil Surges to Seven-Week High as Refinery Operating Rates Gain
By Mark Shenk
March 3, 2010 (Bloomberg) — Oil rose to a seven-week high after a U.S. government report showed that refinery operating rates climbed to the highest level since October, bolstering demand.
Refinery utilization increased 0.7 percentage point to 81.9 percent in the week ended Feb. 26, the Energy Department said. Analysts surveyed by Bloomberg News forecast that there would be no change. Inventories of crude oil climbed 4.03 million barrels, more than three times what was estimated.
Refinery run rates increased strongly, which should whittle down the huge oversupply of crude oil,” said Sean Brodrick, a natural resource analyst with Weiss Research in Jupiter, Florida. “This market just wants to go higher, even when there is bearish news.”
Crude oil for April delivery increased $1.19, or 1.5 percent, to $80.87 a barrel on the New York Mercantile Exchange, the highest settlement since Jan. 11. Futures are up 94 percent from a year earlier.
The gain in refinery operating rates has coincided with an increased profit margin, or crack spread, for refining crude. The margin for processing three barrels of oil into two of gasoline and one of heating oil has surged 46 percent this year to $11.27 a barrel, based on futures prices. It was the highest level since Aug. 19.
“Refiners will keep increasing runs because of the improving crack,” Brodrick said.
Total U.S. fuel demand, averaged over the past four weeks, was 19.3 million barrels, up 3 percent from a year earlier, the department said.
Improving Demand
We’re seeing a little demand improvement, which gives impetus to higher prices,” said Chip Hodge, who oversees a $9 billion natural-resource bond portfolio as senior managing director at MFC Global Investment Management in Boston.
Stockpiles of crude oil rose 1.2 percent to 341.6 million, the highest level since August, the report showed. It was the biggest gain since the week ended July 24.
An increase in oil supplies on the U.S. West Coast, a region classified by the department as PADD 5, was responsible for much of the nationwide gain, the report showed. Stockpiles there surged 2.31 million barrels to 51.2 million. The region’s distribution system is isolated from the rest of the country.
“The market may be ignoring the build because more than half of it occurred in PADD 5,” said Tom Bentz, a broker at BNP Paribas Commodity Futures Inc. in New York. “We are trading on a lot of things other than the inventory data.”
Dollar Weakness
Oil also advanced as the dollar weakened, increasing the investment appeal of commodities. The common currency rose after Greece approved an additional 4.8 billion euros ($6.6 billion) of deficit cuts. The dollar traded at $1.3702 per euro, down 0.6 percent from $1.3615 yesterday.
Regarding oil, “you are going to see it breaching $90 a barrel, up to $100 barrel; $147, $150 is out of the question in the near term,” Haag Sherman, who helps oversee $8 billion as chief investment officer of Houston-based Salient Partners, said on Bloomberg Television. “Energy and also precious metals have been a safe haven for people who are wary of the U.S. dollar.”
The Reuters/Jefferies CRB Index of 19 commodities climbed 0.9 percent to 277.71. Gold for April delivery rose $5.90, or 0.5 percent, to settle at $1,143.30 an ounce on the Comex division of the Nymex.
“We’re looking at support from the currency markets as the euro sees some short-term strength with the passing of the Greek budget,” said Harry Tchilinguirian, head of commodity derivatives at BNP Paribas SA in London.
Economic Optimism
“There continues to be optimism that economic growth will accelerate, and with it demand,” Hodge said.
Service industries in the U.S. accelerated in February more than anticipated, indicating the economic expansion may soon create jobs following the worst employment slump in the post- World War II era. The Institute for Supply Management’s index of non-manufacturing businesses, which make up almost 90 percent of the economy, rose to 53 in February from 50.5 the prior month.
A Saudi Arabian-flagged product tanker was captured by pirates in the Gulf of Aden on March 1, the European Union Naval Force said. The tanker, with a crew of 14, was heading for the Red Sea port of Jeddah, according to Commander John Harbour, a spokesman for EU Navfor in Northwood, England.
Nigerian Attacks
Shell’s Kokori oil flow station in Nigeria was attacked yesterday as militants renewed operations against the energy industry in the southern Delta region. The People’s Patriotic Revolutionary Force claimed responsibility for the assault in a statement, saying it had begun “fresh and final hostilities in the Niger Delta and beyond.”
Brent crude oil for April delivery climbed $1.07, or 1.4 percent, to $79.25 a barrel on the London-based ICE Futures Europe exchange, the highest settlement since Jan. 12.
Oil volume on the Nymex was 528,519 contracts as of 3:09 p.m. New York. Volume totaled 529,808 contracts yesterday, 10 percent less than the average of the past three months. Open interest was 1.3 million contracts.
—With assistance from Grant Smith in London and Betty Liu in Houston. Editors: Joe Link, Dan Stets
To contact the reporter on this story: Mark Shenk in New York at mshenk1@bloomberg.net. Last Updated: March 3, 2010 15:49 EST

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