[Donger]

N.Y. Oil Rises to a Record Close on Signs Supply Is Inadequate

By Mark Shenk

July 31 (Bloomberg) -- Crude oil rose to a record close of $78.21 a barrel in New York on speculation demand will outpace supply as refiners increase fuel production.

Bets on rising prices by hedge funds and other speculators rose to a record earlier this month, according to U.S. Commodity Futures Trading Commission data. Global demand will climb 1.7 percent in 2008, showing no sign of slowing because of high prices, a Deutsche Bank AG report showed. A government report tomorrow may show U.S. oil supplies fell for a fourth week.

``There's significant growth in global energy demand and production isn't keeping up,'' said Peter Schiff, an investment adviser and president of Euro Pacific Capital Inc., in Darien, Connecticut. ``Prices have to rise because of this imbalance. I'm sure we are going to pull above $100 a barrel in 2008.''

Crude oil for September delivery rose $1.38, or 1.8 percent, to settle at $78.21 a barrel at 2:57 p.m. on the New York Mercantile Exchange, the highest close since trading began in 1983. Futures touched $78.28, the highest intraday price since reaching a record $78.40 a barrel on July 14, 2006.

Oil in New York rose to a record last year on concern fighting in Lebanon between Israel and Islamic militia Hezbollah would spread through the Middle East.

A U.S. pullout from Iraq may be the event that pushes oil to $100 a barrel this year, according to Boone Pickens, the Dallas hedge fund manager who has joined Forbes Magazine's list of billionaires because of his bullish bets on energy prices.

Brent crude oil for September settlement rose $1.31, or 1.7 percent, to close at $77.05 a barrel on the London-based ICE Futures exchange. Brent oil touched a record $78.64 on Aug. 7, 2006, after BP Plc closed Alaska's Prudhoe Bay oil field.

Lost Premium

Brent, which is produced in the North Sea, lost its premium over West Texas Intermediate blend, the U.S. benchmark, last week. Brent had been higher than New York-traded WTI for most of this year, as crude-oil supplies rose at Cushing, Oklahoma, the delivery point for Nymex futures. The U.S. grade traded at a record $6.54 a barrel discount to Brent on May 24, based on closing futures prices.

``There's a lot of speculative money in the market and it's all weighed toward higher prices,'' said Brad Samples, commodity analyst for Summit Energy Services Inc. in Louisville, Kentucky. ``They are latching on to anything that's bullish, which at the moment is the prospect that crude stocks fell last week.''

Net-long positions in crude-oil futures held by speculators reached a record of 112,287 contracts in the week ended July 10 on the Nymex, according to U.S. Commodity Futures Trading Commission data. Long positions are bets that prices will rise. Net-long positions slipped to 108,782 contracts in the week ended July 24, according to the CFTC.

`Plenty of Oil'

``It's hard to justify $78 oil right now,'' said Eugene X. Hodge, a managing director at John Hancock Financial Services Inc. in Boston, who manages a $4.3 billion oil and gas company bond portfolio. ``You have to look at the speculators. The fundamentals don't support these prices because there's still plenty of oil out there.''

Crude-oil supplies dropped 1.13 million barrels in the week ended July 27, according to the median of responses by 14 analysts surveyed by Bloomberg News before tomorrow's report.

``The path of least resistance is up,'' said Tom Bentz, a broker at BNP Paribas in New York. ``Earlier this year the products led us higher but that's no longer the case. Crude is now taking the lead as the crack has come in sharply.''

The profit margin, or crack spread, for turning crude oil into fuels is up 43 percent this year. It rose to $30.479 on May 17, the highest since at least 1989, based on closing futures prices in New York. The margin tumbled to $10.43 yesterday, the lowest since Feb. 16.

Record profit margins on gasoline and diesel pushed Valero Energy Corp. net income 19 percent higher during the second quarter, the company said. Profit climbed to a record $2.25 billion, San Antonio-based Valero said today in a statement.

Rising Demand

Oil demand in China may increase 5.6 percent in 2008 with the potential for further gains because of additional energy use prompted by the Beijing Olympic Games, Deutsche Bank analyst Adam Sieminski wrote in a report dated July 27. China's daily oil use will grow by 430,000 barrels a day to 8 million barrels next year, Sieminski wrote.

The International Monetary Fund on July 25 raised its forecast for world economic growth to 5.2 percent for this year and next.

``Given IMF projections and the very slow ramp-up in production, higher prices are inevitable,'' said Stephen Leeb, president of Leeb Capital Management, which oversees $170 million in New York. ``The high price in dollars isn't that great for OPEC because of the strength of the euro.''

The dollar has traded at a discount to the euro this year, making dollar-priced oil imports cheaper for the 13 nations that share the euro. In U.S. dollars, West Texas Intermediate, the New York-traded crude benchmark, is up 5.1 percent in the past 12 months. Oil has dropped 2 percent in euros, 3.6 percent in British pounds and has risen 9.3 percent in yen.