Oil prices climb on supply decline

Oil futures surged Wednesday after the U.S. government reported large and unexpected declines in crude oil and gasoline inventories.

Crude supplies fell last week by 5.3 million barrels, the Energy Department's energy information administration said. Analysts in a survey had, on average, been expecting supplies to increase by 300,000 barrels.

"We haven't missed like this in a long time," said James Cordier, president of Liberty Treading Group in Tampa, Fla.

Analysts said the decline was particularly surprising because refineries are shutting down for seasonal maintenance, processing less crude. Refinery activity fell during the week ended Oct. 19 by 0.2 of a percentage point to 87.1 per cent of capacity.

Analysts had expected an increase of 0.3 of a percentage point.

"This time of year, we would look for a build in crude of that magnitude," or around five million barrels, said Brad Samples, a commodities analyst at Summit Energy Services Inc. in Louisville, Ky.

Much of the decline in crude supplies was due to a sharp drop in imports, analysts said. Imports of crude oil fell last week by 1.3 million barrels a day, to an average of 9.1 million barrels a day, the EIA said.

On Wednesday, light sweet crude for December delivery jumped $1.83 to settle at $87.10 US a barrel on the New York Mercantile Exchange.

November gasoline rose 3.86 cents to $2.1475 USa gallon on the Nymex, and heating oil for November jumped 4.22 cents to $2.342 a gallon.

Supplies of gasoline and heating oil also fell last week. Gasoline inventories dropped by two million barrels, countering analyst expectations for an increase of 1.1 million barrels.

It may seem odd that imports of crude oil fell sharply in a week when oil prices reached records above $90 a barrel for the first time, but analysts explain that it takes several weeks for crude to reach the U.S. from overseas suppliers. Crude's record prices last week may well prompt a jump in imports, and thus supplies, in the weeks to come.

"If not, we're going to have to price in some tight supplies," Cordier said.

Samples cautioned that the import numbers are particularly volatile and can be affected by the position of a few tankers. Where ships are and when they unload can cause wide swings in import data from week to week.

"It gets pretty muddled," Samples said of import data.

But the dramatic drop in crude oil inventories is sure to add to the debate between analysts and investors who believe oil supplies are tightening as winter heating season approaches, and those who feel supplies are plentiful. Oil prices have retreated each day since setting a record of $90.07last Thursday.

"We were looking for this [report] to give us an indication of whether that easing was warranted," Samples said.