U.S. Petroleum Inventory Drops, Oil Prices Soar Higher

Oil's eight-month rally hit yet another high Sept. 29 as dealers cited news that U.S. petroleum inventories had dropped to near-three-year lows as proof OPEC supply curbs were biting deep ahead of winter. Benchmark Brent crude blend touched $24.30 a barrel, a 33-month high, after the American Petroleum Institute said crude stocks in the world's biggest oil consumer fell by 3.7 million barrels last week to stand at their lowest levels in almost three years. The underlying picture was even tighter because a slight rise in isolated U.S. West Coast stocks boosted the headline figure and masked a whopping 6.4 million barrel drop in key reserves east of the Rockies. Oil stocks in the U.S. have declined steadily during six months of OPEC output cuts, and look to come under even more pressure when the onset of winter ratchets up demand for energy. At its ministerial meeting in Vienna last week, OPEC reaffirmed output curbs that have more than doubled crude prices this year by keeping a stranglehold on supply. U.S. stockpiles have now drained down to 305 million barrels - and analysts said there was nothing to stop them breaking below 300 million barrels, a level not seen since early 1997 when oil cost more than $25 a barrel. "Winter is approaching, stocks are declining, people are starting to worry about supply - which of course will be intensified when the cold weather kicks in. All of this makes a very strong potion for high oil prices," Peter Bogin of Cambridge Energy Research Associates Europe said. "It's all down to the fact that OPEC is maintaining its production discipline. Unless OPEC or some members of OPEC decide to change their position, prices are still poised on the upside." Speculation last week that the U.S. might sell oil from its emergency reserves to put a cap on domestic heating bills this winter was unlikely to be fulfilled in the near future, he added. "We can't exclude it, but on the other hand we have to go a lot further than where we are now. Strategic reserves; note the name. They are not going to clear out the pantry just because prices look a bit high." The only cloud on the horizon for crude prices was the possibility OPEC might rethink its supply curbs, or individual states renege on them. "It's a remote possibility...But never underestimate the ability of OPEC to shoot itself in the foot," Bogin said.