Oil prices climb as U.S. domestic supply shrinks

Oil prices rose Wednesday after energy traders shrugged off OPEC's decision to boost its output target and a government report showed that domestic supplies shrank last week amid higher gasoline demand.

"Right now, the bullish news gets all the glory," said John Kilduff, an oil analyst at Fimat USA in New York.

The world has plenty of crude oil and motor fuel to meet daily demand, Kilduff said, but what it lacks is a large enough supply cushion to temper fears about possible supply disruptions. "The market is pricing in the worst case scenario," he said.

Light sweet crude for July delivery rose 60 cents to $55.60 per barrel in afternoon trade on the New York Mercantile Exchange, putting oil futures roughly 50 percent higher than a year ago. Prices climbed as high as $56.75 earlier in the day.

In London, Brent crude futures rose 77 cents to $54.50 a barrel on the International Petroleum Exchange.

Wednesday's rally was sparked by the Energy Department's weekly supply snapshot, which showed U.S. inventories of crude oil fell by 1.8 million barrels last week to 329 million barrels, leaving supplies almost 9 percent above year ago levels.

What also stood out in the report, Kilduff said, was that gasoline demand over the past four weeks has averaged almost 9.5 million barrels per day, roughly 3 percent above year ago levels in spite of retail gasoline prices averaging $2.13 per gallon nationwide.

July gasoline futures jumped 4.61 cents to $1.587 per gallon on Nymex, while heating oil futures climbed more than a penny to $1.65 per gallon.

The Energy Department report said gasoline inventories slipped by 900,000 barrels to 215.7 million barrels, or 5 percent higher than a year ago. The supply of distillate fuel, which includes diesel and heating oil, grew by 2.5 million barrels to 110.2 million barrels, or 1 percent above year ago levels.

Also on Wednesday, the Organization of Petroleum Exporting Countries agreed to increase its official production quota from 27.5 million barrels a day to 28 million barrels per day, and members said they would consider another 500,000 barrel per day increase if prices remained high.

Analysts said the market was unimpressed because OPEC's decision would have little impact on actual output.

The 10 OPEC members bound by the output quota are already pumping some 28 million barrels a day. Including Iraq, which is not bound by the quota, OPEC's production was 29.3 million barrels a day in May, according to the International Energy Agency.

"OPEC is producing flat out. They have nothing left in the tank," said oil analyst Fadel Gheit at Oppenheimer & Co. in New York.

Gheit said OPEC officials are somewhat justified in pointing the finger at the United States and the rest of the world for not adding enough refining capacity to keep up with growing demand. Still, he said the U.S., the world's largest energy consuming nation, has proven that its economy can grow despite high oil prices due to efficiency gains made in recent decades.

In the first three months of the year, the U.S. economy grew at a 3.5 percent annual rate, according to the Commerce Department, slightly slower than the 4.5 percent pace a year earlier.

President George W. Bush, speaking at an energy conference in Washington, said the country needed to make further gains in energy efficiency - as well as produce and refine more oil at home - to make the country less dependent on foreign fuel sources. He prodded Congress to pass an energy bill this summer.

"The American people know that an energy bill will not change the price of gas immediately, but they're not going to tolerate inaction in Washington as they watch the underlying problems grow worse," he said.

BRAD FOSS, AP Business Writer