Oil prices move higher on rumor that Saudi Arabia is warning customers of major cuts

Source: Agencies  |   2008-12-11  |     ONLINE EDITION

OIL prices rose amid volatile trading yesterday on rumors that Saudi Arabia has warned major customers of significant production cuts.

Prices quickly gave up strong early gains after the government reported US gasoline inventories were well above expectations, then reversed course jumped close to 10 percent.

"The rumor was put out that Saudi oil customers should get prepared for major production cuts," said Phil Flynn, an analyst with Alaron Trading Corp.

Light, sweet crude for January delivery rose 3.4 percent, or US$1.45, to settle at US$43.52 on the New York Mercantile Exchange.

Many traders have almost completely discounted OPEC's ability to control prices, however. Oil trader and analyst Stephen Schork credited the gains to an oversold market.

After hitting US$40.50 a barrel last week, some oil traders believe that if the market has not bottomed out, it is close do doing so.

For the week ended Friday crude inventories rose by 400,000 barrels, or 0.1 percent, to 320.8 million barrels, which is 7.7 percent above year-ago levels, the Energy Information Administration said in its weekly report.

Analysts had expected a boost of 2.7 million barrels, according to a survey by Platts, the energy information arm of McGraw-Hill Cos.

Yet demand for gasoline over the four weeks ended Friday was 3.2 percent lower than a year earlier, averaging 8.9 million barrels a day.

"By and large this report shows we've got a lot more product out there than most people thought we did," said Jim Ritterbusch, president of Ritterbusch and Associates. "This is just one more indication of a weak demand environment."

All eyes are now turning to Algeria, where OPEC meets next week.

The Organization of Petroleum Exporting Countries, which accounts for about 40 percent of global crude supply, has signaled that it plans to reduce output quotas.