Oil prices jumped up, as investors questioned whether supplies of crude, gasoline and heating oil are adequate to meet demand.
With heating season about to begin, investors are betting demand for crude oil will jump as refineries start producing more heating oil. And refineries that are focused on heating oil will be turning out less gasoline.
The Energy Department on Wednesday reported that crude inventories rose by 1.2 million barrels last week, while supplies of distillates including heating oil fell by 1.2 million barrels. Gasoline supplies fell by 100,000 barrels. Traders view that increase in crude supplies as inadequate, said James Cordier, president of Liberty Trading Group in Tampa, Florida.
"That's nothing," Cordier said. "We expect to see figures of 3 (million) and 5 (million) barrels."
Light, sweet crude for November delivery rose $1.50 to settle at $81.44 a barrel on the New York Mercantile Exchange after falling more than $1 earlier. Crude's uncertain direction early in the day reflected a battle between investors betting that demand will tighten, and those who feel oil has peaked and begun a seasonal decline.
"This market is going to break seasonally or the global economy is going to find (oil prices are) a bargain," Cordier said.
Oil prices also drew support from heating oil and gasoline futures. Nymex heating oil rose 5.26 cents to settle at $2.2313 a gallon, while November gasoline rose 5.63 cents to settle at $2.0522 a gallon. Prices of both were supported by the inventory declines and several minor refinery outages on the West Coast.
November natural gas rose 13.5 cents to settle at $7.412 per 1,000 cubic feet. The Energy Department reported that natural gas inventories rose by 57 billion cubic feet last week, less than the 65 billion-cubic-foot increase analysts forecast.
Some analysts said a smattering of weather systems strung from the Gulf of Mexico to the central Atlantic were supporting natural gas prices, though none of the storms are expected to develop quickly into subtropical or tropical storms and threaten critical gas and oil infrastructure in the Gulf.
In London, November Brent crude rose $1.78 to settle at $78.97 a barrel on the ICE Futures exchange.
Some analysts think this year's record gas prices are affecting demand, which fell last week. But prices will remain high if supplies continue falling.
In the fall, many refineries shut down for maintenance, then ramp their operations back up to turn out home heating oil. That ramp up, which could start as soon as this month, could increase demand for crude oil,
"Crude demand typically bottoms out by late September (or) early October," then begins growing, said Stephen Schork, a trader and analyst in Villanova, Pennsylvania, in his daily Schork Report.
Traders shrugged off two reports Thursday that suggest the economy may be slowing. The Labor Department said applications for unemployment benefits jumped by 16,000 last week, the biggest increase since May and above analyst expectations. And the Commerce Department said factory orders dropped by 3.3 percent last month, worse than the 2.8 percent decline analysts forecast.
Energy investors usually worry that a slowdown in the economy could mean demand for petroleum products will fall. The fact that the traders ignored the reports reinforces many analysts' view that supplies are tight enough to support high energy prices.
"If we can't go lower now in crude oil, and crude oil is at the nadir now of demand ... what's going to happen in another month when ... refineries ramp up production (to serve the winter heating market)," Schork said.
The British press has recently reported that Russia was going to conduct a nuclear test either on the borders with Ukraine or in the Black Sea.