Oil surges on gasoline shortfall

Crude posts biggest one-day gain in nearly 3 weeks on surprise decline in supplies and Goldman forecast of higher prices.

NEW YORK - Oil prices rallied as much as $5 a barrel Wednesday after a surprise decline in the nation's gasoline stockpile, and a forecast from Goldman Sachs that said crude could hit $149 a barrel by year's end.

Light, sweet crude for September delivery rose $4.58 to settle at $126.77 on the New York Mercantile Exchange, posting its biggest one-day gain since it rose $5.60 on July 10.

A report from the Energy Department showed a 3.5-million barrel decrease in gasoline supplies, and a decline of 100,000 barrels of crude oil in the week ended July 25.

Investors anticipated a drop in crude stocks due to the limited effects of Hurricane Dolly on production in the Gulf of Mexico, but they hadn't expected a draw in gasoline supplies.

"That gasoline data was a positive surprise (for prices)....that is taking crude up," wrote Tom Orr, head of research at Weeden & Co. in an e-mail.

Analysts polled by energy research firm Platts had expected to see a 400,000 barrel increase in gasoline supplies, and a decline of 1.3 million barrels of crude oil.

Gasoline demand: The government's inventory report reinforced a weekly survey released Tuesday from MasterCard Advisors that showed demand for gasoline at the pump had hit its highest level since the beginning of the year, though it still remained significantly lower than the same week a year ago.

"It seems the hard lessons that were learned at $4 a gallon (gasoline) and above have faded," said John Kilduff, energy analyst with MF Global in New York.

Average prices for regular gasoline in the U.S. fell for the 13th straight day Wednesday to $3.926 a gallon after hitting a peak of $4.114 on July 16. Still, prices remain more than 35% higher than they were a year ago, according to motorist group AAA.

$149 a barrel?: A report by Goldman Sachs predicting prices could reach new heights was also feeding the rally.

The falling demand for crude, which had driven down prices more than $25 a barrel over the past two weeks, was only temporary, a Goldman analyst wrote in a report released Wednesday. The report went on to predict that prices would jump back up again to hit $149 a barrel by the end of the year.

"Basically Goldman Sachs hit right at the heart of why the market was going down," said Phil Flynn, senior market analyst at Alaron Trading in Chicago.

Oil's about-face: Just before the report's release, oil was down $1.08 to $121.11 a barrel as the anticipated increase in gasoline stocks would have indicated that demand has fallen in the United States, the world's largest consumer.

Oil investors worried that high prices for fuel made from crude oil have seriously damaged demand.

Despite Wednesday's rise, oil remained down 14% from the trading peak of $147.27 set July 11. Prices remained 65% higher than they were 12 months ago.

Supply: Concerns about supply disruptions from volatile oil producing nations such as Nigeria also gave prices a small boost.

On Tuesday, Royal Dutch Shell (RDS) said it would be unable to fulfill production obligations from Nigeria for three months due to an attack by militants that destroyed two pipelines.

Supply disruption worries have been a major factor in oil's record price increase. But because attacks on oil infrastructure in Nigeria have been relatively common over the past several months, many analysts believe the oil market may have already factored them into the price.