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Drop in supplies gives oil market another excuse to rally

June 10, 2009 |  1:59 pm

There must be a ceiling out there for oil prices. But $70 a barrel evidently isn’t it.

Crude rallied again today, pushing near-term futures prices in New York up $1.27 to $71.28 a barrel, the highest since Oct. 20.

The government reported that U.S. oil inventories last week dropped by 4.38 million barrels, to 361.6 million, the fourth decline in five weeks. That is heartening oil bulls who were driving prices higher even as supplies rose in March and April, figuring it was only a matter of time before the inventory picture went their way.

"This was an incredibly bullish report," Mike Zarembski, senior commodity analyst at OptionsXpress Holdings Inc. in Chicago, told Bloomberg News. "There were big drops in both crude oil and gasoline, falling imports and increased gasoline demand."

OiltraderIt doesn’t matter that crude stockpiles remain 11% above their five-year average for this point in the year, according to Bloomberg’s calculations.

"You’re going to see a reduction in supplies in the U.S. all summer long because the refiners are going to import less and work off the huge inventories they have," James Cordier, portfolio manager at OptionSellers.com in Tampa, Fla., told Bloomberg.

Despite oil’s climb, some analysts are optimistic that gasoline prices may be nearing a peak, with average pump prices in California now at $2.89 a gallon.

But we’ve heard that one before.

Meanwhile, much of the blame for oil’s latest run-up continues to be pinned on rank speculators (a replay of the first half of 2008) and on investors who are looking for an inflation hedge in case a global economic recovery takes hold later this year.

From Bloomberg:

"The fundamentals certainly don’t support prices at these levels," said Addison Armstrong, director of market research at Tradition Energy in Stamford, Conn. "The real story behind the strength in oil is the momentum trading that has seized the commodities markets, carrying oil and the other energy futures along with it."

"Investors are scared about inflation so they are buying things that offer protection," said Bill O’Grady, the chief markets strategist at St. Louis-based Confluence Investment Management, an investment advisory and management firm. "It’s hard to stand up against these investment flows even if they are not completely rational."

-- Tom Petruno

Photo: A trader signals in the oil options pit in New York today. Credit: Daniel Acker / Bloomberg News

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