Oil Prices Rise While Gasoline Gives up Some Gains

Gasoline futures Tuesday gave back some of their prior-day gains as the oil market weighed the impending arrival of Hurricane Isaac.

Front-month oil futures for delivery on the New York Mercantile Exchange settled at $96.33 a barrel, up 86 cents or 0.9% after a report dismissed the chance of an emergency oil stockpile release. Gasoline futures, which jumped 2.5% Monday, closed at $3.126 per gallon, down 2.87 cents, or 0.9%. Brent futures settled at $112.58, up 32 cents.

The combination of the rise in oil prices and drop in gasoline prices was a reversal of Monday's trading, when gasoline futures surged on news of U.S. refinery closures due to the threat posed by Isaac. On Monday, oil sank because of lower demand for crude resulting from the refinery closures and speculation that there could be a release of emergency oil stockpiles.

But Tuesday, Maria Van der Hoeven, the executive director of the International Energy Agency, was quoted by Bloomberg News as saying there was no need for a strategic stock release because the oil market is "sufficiently well supplied."

Market participants also attributed Tuesday's trading in gasoline to profit-taking after Monday's surge. Oil also garnered additional strength from the weakening dollar and strengthening euro, market participants said.

At 2 p.m Eastern Standard Time, the National Hurricane Center upgraded Isaac to a Category 1 Hurricane. The storm, currently about 135 miles Southeast of New Orleans, has maximum sustained winds of 75 miles per hour. The storm has a "dangerous" storm surge and threatens to result in heavy rainfall, the NHC said.

On Monday, Gulf Coast refiners shut about 1.3 million barrels of fuel-production capacity, equal to about 8% of total U.S. output, according to the Department of Energy. Those shutdowns come amid a tight U.S. gasoline market, especially on the East Coast. Energy producers also shut 1.08 million barrels of oil a day and 2.2 billion cubic feet of natural gas per day.

While Isaac isn't expected to pose a major threat to oil and gas production, there is still a chance the storm could result in significant refinery upheaval if there is flooding or the loss of power. Andy Lebow, senior vice president of energy futures at Jefferies Bache, described the outlook for refining as a "wait and see."

But Hamza Khan, an analyst with the Schork Group, a commodity analysis and energy market intelligence firm, said the market was already looking past Isaac. While last week's forecasts gave the storm a 30% chance of strengthening into a Category 3 storm, those odds now stand at 5%, he said. "So a lot of the risk premium has been removed," Mr. Khan said.

"The focus is shifting away from Tropical Storm Isaac and towards the fundamentals and the dollar," Mr. Khan said.

Besides Isaac, market participants are eyeing the release of U.S. crude inventories on Wednesday by the Department of Energy. Some analysts think a major decline in oil inventories could spur more buying. A Dow Jones survey of 15 analysts said crude-oil inventories likely fell 1.5 million barrels in the week ended Friday.

Also on the radar is a major speech by Federal Reserve Chairman Ben Bernanke Friday at the Fed's annual Jackson Hole gathering.

The oil market has for weeks gained momentum from expectations of further quantitative easing efforts by the U.S. Federal Reserve and other central banks. But market participants said it was still uncertain whether Mr. Bernanke will advance the case when he addresses the event.

Front-month heating oil settled at $3.120 per gallon, up .85 of a cent.


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