Oil prices rise with some traders buying cheap

January 20, 2009 8:02:13 AM PST
Traders that could find scarce storage space for crude took advantage of prices hovering near five-year lows Tuesday, reversing at least for a moment the downward spiraling cost of oil. With the February contract expiring at the end of trading Tuesday, light, sweet crude rose 3.3 percent, or $1.22, to $37.73 per barrel on the New York Mercantile Exchange.

The contract has fallen about one-third in two weeks because of burgeoning supplies at Cushing, Okla., the delivery point for the Nymex.

With storage tight on land, there are an estimated 80 million barrels of oil being held in large tankers offshore, said Jim Ritterbusch, president of energy consultancy Ritterbusch and Associates.

"We're filling up every crevice of storage that anybody can find," he said. "The pipelines are filled up, the terminals are filled up. Refiners are amply supplied. This is a market that definitely has a surplus."

If crude at sea has reached 80 million barrels, it could almost supply the entire globe for a day.

Investors have turned their attention to the March Nymex contract where trading volume is far greater. Prices rose 31 cents to $42.88 on Nymex.

In London, the March Brent contract rose 57 cents to $45.37 on the ICE Futures exchange.

"The true price of crude today is somewhere between $40-$45 a barrel," said Victor Shum, an energy analyst with consultancy Purvin & Gertz in Singapore.

Weighing on all the contracts is a severe recession in developed countries and a slump in global oil demand. Hundreds of U.S. companies report fourth quarter earnings this week and could cement fears that the global economy is worsening.

Schlumberger Ltd., the U.S. oil services giant, leads off the energy sector when it reports earnings Friday. It has already warned of job cuts.

Traders fully expect that the March contract will follow the downward arch of the contract that expires today if there is no morale-boosting economic news soon.

"We need to see enough improvement in demand to absorb some of these excess supplies," Ritterbusch said.

Trader and analyst Stephen Schork said the current gloomy economic indicators in the United States - such as the rising jobless rate and falling industrial production - did not point to a quick recovery.

"Bottom line, we have high supply and low demand. Why should the March Nymex crude oil not trade below $40 ... or 30?" Schork wrote in his daily market comment.

Investors will also be eyeing the inauguration of President-elect Barack Obama on Tuesday for any hints regarding the government's economic and energy policies.

Ritterbusch said the ceremony may give oil a little bust but from a market perspective "it's news that's already been discounted."

In other Nymex trading, gasoline futures fell less than a penny to $1.1576 a gallon. Heating oil dropped to 3.47 cents to $1.4387 a gallon while natural gas for February delivery slid 11.6 cents to $4.685 per 1,000 cubic feet.

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Associated Press writers Alex Kennedy in Singapore and Pablo Gorondi in Budapest, Hungary, contributed to this report.

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