Crude Prices Surge After Mexico Pipeline Blast

NEW YORK – Crude oil futures rallied back above $53 late on Wednesday on speculation and panic sparked by an oil line explosion in Mexico.

Traders were also nervously monitoring developments in Nigeria's national strike and recovery efforts in the Gulf of Mexico.

Crude for November delivery surged $1.13 to settle at $53.64 per barrel on the New York Mercantile Exchange (search), after falling as low as $51.49 in morning trading. On Tuesday, light, sweet crude settled at $52.51 after hitting an all-time high of $54.45.

A 30-inch oil line exploded in eastern Mexico on Wednesday morning, according to local officials. Enrique Fonseca, chief for the communication center of the Veracruz state civil defense agency, said workers from the government oil company Petroleos Mexicanos (search), or Pemex, had closed off the line and were working to contain the spilled oil.

The news was enough to set off buying in an already jittery market atmosphere, said Ed Silliere, vice president of risk management at Energy Merchant LLC in New York.

"It looked as if we were starting a corrective phase in the market," Silliere said. "But you don't expect a correction to last one day ... That's not normal."

Although the strength of the rally came as a surprise to many, analysts nevertheless had not expected yesterday's drop to last for long.

"I think the selloff yesterday and the selloff today were more technical in nature than fundamentally driven," said Phil Flynn, an analyst at Alaron Trading Corp. in Chicago. "It's hard to find too many reasons to be negative on prices, at least for the near-term."

Rising prices have been driven by tight supplies. The American Petroleum Institute (search) reported Wednesday that U.S. oil production fell 15 percent in September to the lowest monthly level in more than half a century, led by sharp declines in output from Alaska and the hurricane-hit Gulf of Mexico region.

In the same month, the API said, total U.S. demand grew 3 percent compared to a year ago.

While oil prices are around 60 percent higher than a year ago, they are still more than $27 below the peak inflation-adjusted price reached in 1981.

Many market observers say prices are likely to continue to skyrocket because of continuing supply concerns.

Misui Bussan, chief commodities strategist for Tetsu Emori in Tokyo, called the drop earlier in the day "a small correction just before the winter season."

"It's a normal cycle," Bussan said. "The current price was overbought, the market needed to see some correction."

On the International Petroleum Exchange in London, Brent crude for November delivery rose 45 cents to settle at $50.05 per barrel. Brent briefly soared above $50 on Tuesday.

Excess capacity now hovers just about 1 percent above the world's daily diet of 82 million barrels, and the Paris-based International Energy Agency (search), a watchdog for oil-consuming countries, said Tuesday that demand is expected to rise to close to 84 million barrels a day by 2005.

Adding to supply concerns, the Royal Dutch/Shell Group said its Nigerian output would be cut by 20,000 barrels a day because of a ruptured pipeline. While officials tried to investigate, saboteurs set the pipeline on fire.

The production cuts come in the middle of national strike and a fragile peace deal between rebels and the government for control over the oil-rich Niger Delta that churns out 2.5 million barrels of crude daily.

Nigeria is Africa's largest exporter.

Both Nigeria and the Gulf of Mexico produce low-sulfur content crude, particularly desirable for refiners and in high demand currently.

Repeated efforts by the Organization of Petroleum Exporting Countries to lower prices by boosting output have been largely ineffective because the oil they offer the market has a high-sulfur content.

Developments in Russia came firmly back into play as the Justice Ministry moved to sell an unspecified chunk of oil giant Yukos' subsidiary Yuganskneftegaz to meet some of its $7 billion back tax bill. Russian officials valued Yukos' largest production unit at $10.4 billion, the low end of what an independent bank had recommended.

Yukos produces about 2 percent of the world's oil and said it might have to cut production if the government continues its relentless pursuit of the taxes.