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October 11, 2000

Crude Oil Gains on Decline in U.S. Heating Oil Inventories
By Mark Shenk, Bloomberg

Oil Prices Start Soaring Again ... Weiss comments

NEW YORK - Crude oil rose more than 2%, reaching $34 a barrel for the first time in three weeks, after U.S. heating oil inventories fell unexpectedly, renewing concern that there could be a winter fuel shortage.

Supplies of distillate fuels, including heating oil and diesel, fell 3.31 million barrels or 2.8% last week, the biggest drop since February, the American Petroleum Institute said late yesterday. Heating oil stockpiles dropped almost a million barrels at a time when they normally rise.

"The API distillate numbers were a dramatic slap in the face for the Northeast," heating oil's biggest market, said Phil Flynn, senior market analyst at Alaron Trading Corp. in Chicago. "We are not getting the supplies we need," he said. "The heating oil number is scary."

Crude oil for November delivery rose as much as 82 cents, or 2.5%, to $34 a barrel on the New York Mercantile Exchange, the highest price since Sept. 22. The contract was recently trading 28 cents higher at $33.46. Concern that oil supplies were too tight helped send prices to a 10-year high of $37.80 a barrel last month.

Analysts had generally expected little change in distillate fuel inventories, according to a Bloomberg survey. Reserves as of Friday stood at 113.22 million barrels, down 21% from a year earlier. Supplies of heating oil were down 35%.

Venezuela Strike

Concern about supplies of crude oil intensified after Venezuela's largest oil workers' union, Fedepetrol, said its members went on strike in a wage dispute with Petroleos de Venezuela SA, the state oil company. Venezuela exports about 2.6 million barrels of oil a day and is one of the largest suppliers to the U.S.

The union, whose past strikes met with limited success, has been negotiating a new contract since last year. The company said a contingency plan was in effect.

In the Middle East, clashes between Israelis and Palestinians raised concern that Arab oil producers may enter the conflict, endangering oil supplies from a region that accounts for almost a third of world output.

In October 1973, Saudi Arabia, Libya and other Arab states imposed an embargo on oil exports to the U.S. in response to the Arab-Israeli War, causing shortages and soaring prices.

Just as we started to see some relief at the pump, oil prices shot up again this week when falling oil inventories surprised the market. As we told you before, the hype surrounding the release of America's Strategic Petroleum Reserve would not be enough to dampen prices for long. U.S. refineries are operating at full capacity and cannot keep up. Therefore, gas and heating oil prices are only going to skyrocket as the winter wears on. Also, uncertainty in the Arab-Israeli situation and striking union oil workers in Venezuela indicate that supply concerns could get much worse.

We have already seen the results that high oil prices have had on companies' bottom lines as dismal third quarter results begin to pour in. The outlook for fourth quarter profits is clearly headed off a cliff.

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