Crude oil futures (search) surged more than $1 a barrel Wednesday after the government reported that the nation's supply of distillate fuel, which includes heating oil, shrank for the eighth consecutive week.
With U.S. inventories of distillate fuel falling to 13 percent below year ago levels, light crude for December delivery climbed $1.49 to $48.86 per barrel on the New York Mercantile Exchange (search). Heating oil futures jumped 6.1 cents to $1.403 per gallon.
The force with which prices moved higher on Wednesday surprised many traders, even though many of them had been expecting to see distillate fuel supplies grow — at least a little bit — last week. The likelihood of surpassing $50 a barrel again in the near term just increased, they said.
However, their longer-term view of the market is that winter fuel supplies will not be as tight as they had feared. As a result, oil prices are $6 a barrel cheaper than they were at the end of last month.
After seven straight weeks of rising crude oil inventories traders expect refiners to turn this raw material into the products the market needs, namely heating oil, diesel and jet fuel, all of which fall under the distillate category.
Given the high price of oil, "there's no reason to load up on crude unless they plan to refine it," said Peter Beutel, president of Cameron Hanover Inc., a New Canaan, Conn.-based provider of petroleum supply analysis.
Even though that perspective is shared by many traders, they turned their attention Wednesday to the fact that distillate fuel supplies are, for the moment, still shrinking.
"The market was disappointed by the distillate number," said John Kilduff, senior analyst at Fimat USA Inc., a New York-based brokerage.
The nation's supply of distillate fell by 100,000 barrels last week to 115.6 million barrels, according to the Energy Department (search). The weekly supply report showed crude inventories rose 1.8 million barrels last week to 291.5 million barrels, or just slightly below year ago levels.
Despite Wednesday's rise in crude futures, oil prices are well below the recent peak of $55.17 per barrel set twice late last month.
The United States' oil supply has grown steadily over the past seven weeks due to high levels of imports and the recovery of pre-hurricane season production levels in the Gulf of Mexico.
But that doesn't mean consumers won't get hit with higher heating bills this winter.
On Tuesday, the Energy Department raised its earlier estimate for home heating costs over the next five months to an average $1.88 per gallon from October to March, an increase of 37 percent from a year ago.
"Some of the pressures that pushed prices upward have reversed, but a host of structural factors remain that point to a higher underlying base level," said Energyintel's Tom Wallin in a research report.
Indeed, some traders said that without growth in the nation's supply of distillate fuels, oil prices could make another move toward the $50 a barrel level.
"The window is getting tighter," Flynn said.
Crude futures are 58 percent above year ago levels, but down more than 11 percent from the Nymex high of $55.17 in late October.
In London, Brent crude futures rose $1.04 to settle at $44.75 per barrel on the International Petroleum Exchange.
Oil prices would have to surpass $90 per barrel to reach the inflation-adjusted peak set in 1980.