Oil ends at record near $43

By Myra P. Saefong & Lisa Sanders

SAN FRANCISCO (CBS.MW) — Crude-oil futures closed just pennies short of $43 a barrel Wednesday, with the threat of a production halt at Russian oil giant Yukos and signs of strong U.S. demand driving prices to the highest level ever recorded on the New York Mercantile Exchange.

"Demand outpaces supplies; OPEC may be near full production capacity; and Russia, which was not on traders’ radar screens one month ago, may be the straw that breaks the camel’s back, taking crude oil up to even higher levels," said John Person, head analyst at Infinity Brokerage Services.

Prices have climbed to records, and the next major "stopping point" could be $45, he said.

September crude climbed as high as $43.05 a barrel in New York, before closing at $42.90, up $1.06 for the session. These are the highest levels the exchange has seen in its 21-year history of trading crude futures. The previous intraday record was $42.45, on June 2.

With Russian court authorities ordering Yukos to stop sales, "the market has a fresh impetus to add to the gains posted Tuesday," said Michael Fitzpatrick, an analyst at Fimat USA, in a note to clients.

Person said it’s unclear how significantly or how long a shutdown would affect production. But the market has been building a premium into crude prices for the last week and a half in anticipation of this event, he said.

AFX News reported that the warning is expected to involve Yukos (YUKOY: news, chart, profile) rail deliveries — about one-third of its output. Yukos produces about 2 percent of the world’s oil, or 1.7 million barrels per day.

Also on Nymex Wednesday, August heating oil rose 2.18 cents to close at $1.1442 a gallon, while August unleaded gasoline ended at $1.2954 a gallon, up 5.11 cents, or 4.1 percent.

All in all, "at these record levels there’s no telling what may happen," said Kevin Kerr, a senior trader at Kwest International. Prices may fall back to $37, but that would provide a buying opportunity, so "$50 oil now seems more realistic than ever," he said. See more of his thoughts.

But other analysts argued that the lofty levels may prompt a reality check for traders. See full story.

Supply data imply strong demand

The latest data from the Energy Department and American Petroleum Institute were mixed when it came to crude inventories, but both groups agreed that gasoline stockpiles fell last week. In either case, the figures implied strong demand for oil.

The Energy Department reported a 1.2 million-barrel rise in crude supplies for the week ended July 23 and pegged the total at 300.5 million barrels. But the API reported a 3.1 million-barrel fall to 298.7 million barrels.

Most analysts expected a decline in crude inventories.

The crude reports come on the heels of a 1.4 million-barrel spike in imports. Imports averaged 11.3 million barrels per day last week, the Energy Department said.

"It’s the first week ever that has seen more than 11 million barrels per day of crude arrivals," said Tom Kloza, chief oil analyst at the Oil Price Information Service.

And refinery utilization was around 97 percent of capacity, according to the government data and the API.

Preliminary data show that imports from Nigeria last week were "extremely high," and the market saw "significant quantities" from Canada and Mexico, the Energy Department said.

The figures "prove that demand continues to outpace supplies in light of increased production from OPEC," said Infinity’s Person. See more of his comments.

Gasoline supplies were down 700,000 barrels to 207.7 million barrels, according to the Energy Department. The API reported a 3.3 million-barrel drop to 209.3 million. The API’s posted decline is slightly above many analyst expectations.

Distillate stocks, which include heating oil and jet fuel, rose 700,000 barrels to 119.1 million barrels, according to the Energy Department. They were up 1.9 million barrels at 118.5 million, according to the API. Most analysts expected a climb.

Yukos spells trouble for heating oil supply

The problems at Yukos are likely to hit heating oil the hardest in the long run, said Phil Flynn, a senior analyst at Alaron Trading.

Europe relies on Russia for the fuel during the heating season and if it’s not as available, Europe "will have to go on the world market and compete with U.S. for the supply," he said.

OPIS’s Kloza believes the overall picture for the fuel points to record advances in prices.

"We are clearly headed toward stratospheric numbers," he said.

For example, some sellers last summer offered to cap prices for retail heating oil at $1.069 a gallon, Kloza said.

"This year finds most of the retail numbers in heating oil states in the $1.60 to $1.85 per gallon neighborhood," he said, adding that "those are the kind of prices that usually only crop up when the outside temperature is subzero and we’re in the seventh or eighth inning of winter."

Natural gas up

Natural-gas prices closed higher along with oil on the Nymex, with the August contract closing at $6.048 per million British thermal units, up 5.9 cents.

The September contract, which became the lead-month contract at the session’s close, rose 12 cents to close at $6.142.

"Gas becomes more and more favorable from a fuel-switching perspective the higher crude prices go," said Agbeli Ameko, a managing partner at Enercast.com, an energy-forecasting firm. Some oil users have the capability to switch to natural gas as a less costly option. "So this rally in gas is definitely bullish for natural gas."

Thursday’s Energy Department report on supplies will likely show an increase of 81 billion cubic feet for the week ended July 23, according to Enercast.com.

In equities, meanwhile, energy shares were higher, with the Philadelphia Oil Service Index ($OSX: news, chart, profile) leading the climb. See Energy Stocks.

In the Nymex metals pits, gold futures climbed for the first time in eight sessions. See Metals Stocks.

The Reuters/CRB index, a broad-based measure of commodity futures markets, was up 0.5 percent at 267.02.

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