Oil rises on expectation recession fears overblown

[October 17, 2008]  NEW YORK (AP) -- Oil prices rose to around $71 a barrel Friday from a 14-month low as investors bet fears that a severe global recession will devastate crude demand may be overblown.

Oil has fallen by about half since reaching a record $147.27 on July 11.

"I think the market has been way oversold," said Gavin Wendt, head of mining and resources research at consultancy Fat Prophets in Sydney. "The sentiment has been dominated by fear and panic, and when people are scared, they just keep selling."

By midday in Europe, light, sweet crude for November delivery was up $1.03 to $70.88 a barrel in electronic trading on the New York Mercantile Exchange. The contract dropped overnight $4.69 to settle at $69.85, the lowest settlement price since Aug. 23, 2007.

In London, December Brent crude was up 65 cents to $68.49 a barrel on the ICE Futures exchange.

Investors have been concerned that recent turmoil in the global financial system will trigger a worse than expected slowdown in economic activity. Declines accelerated Thursday after the U.S. Energy Information Administration said in its weekly report that crude stocks rose by 5.6 million barrels last week, well above the 3.1 million barrel increase expected by analysts surveyed by energy research firm Platts.

While U.S. energy supplies have been swelling because of falling demand, they've also grown as U.S. Gulf Coast energy installations continue to increase production after shutdowns caused by Hurricanes Ike and Gustav.

The EIA also said gasoline stock rose by 7 million barrels last week, more than double the build analysts had expected. Demand for gasoline over the four weeks ended Oct. 10 was 5.2 percent lower than a year earlier, averaging nearly 8.8 million barrels a day, the EIA said.

"We don't know how deep of a recession we're going to have," Wendt said. "But even in a dire economic situation, a lot of energy use isn't discretionary, so I expect prices to bounce back at some point."

Investors have brushed off recent comments by OPEC members that the group may cut production. OPEC said Thursday it was moving up by almost a month an emergency meeting to discuss oil's rapid drop in value, including if a production cut is needed. The Organization of Petroleum Exporting Countries will now meet Oct. 24 at its headquarters in Vienna, Austria, instead of Nov. 18.

OPEC is expected to cut output by around 1 million barrels a day to "protect what the organization's president Chakib Khelil reportedly called an 'ideal' price of $70 to $90 per barrel," said JBC Energy in Vienna, Austria.

"However, whether a cut will be sufficient to flip market sentiment is questionable as lower output means more spare capacity, so in the event of demand picking up it should not be a problem to ramp up supplies," JBC said.

In other Nymex trading, heating oil futures rose 1.8 cents to $2.1053 a gallon, while gasoline prices gained 3.95 cents to $1.6615 a gallon.

Natural gas for November delivery jumped 14.8 cents to $6.851 per 1,000 cubic feet. Forecasts for cold weather in several U.S. regions were seen boosting demand for natural gas for heating.

[Associated Press; By PABLO GORONDI]

Associated Press writer Alex Kennedy in Singapore contributed to this report.

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