Crude rallies to surpass $110 as dollar falls

Futures hit new highs, shrug off surprise increase in U.S. inventories

SAN FRANCISCO (MarketWatch) -- Crude-oil futures gained more than $1 Wednesday to surpass $110 a barrel for the first time, moving higher as the dollar fell to a new low against the euro in a lift for dollar-denominated oil prices and as speculation increased in the futures market.

The gains came even after government data showed a surprising upturn in U.S. crude inventories in the latest week.

Crude oil for April delivery hit a new record high of $110.20 a barrel on the New York Mercantile Exchange in late afternoon trading. It was last seen up $1.05 a barrel, or 1%, to stand at $109.80. The benchmark contract was mostly in negative territory during morning trading after the inventories report.

U.S. crude inventories rose 6.2 million barrels to 311.6 million barrels in the week ended March 7, the Energy Information Administration reported. Analysts surveyed by Platts had expected an increase of 1.6 million barrels.

"Today's report is overwhelmingly bearish," said Chris Lafakis, an analyst at Moody's Economy.com. "There isn't a positive element in today's report for the oil bulls."

But some analysts believe the bearish news could instead push oil prices higher as investment funds resort to a buy-the-dip mentality, especially with the dollar under pressure. Crude has been making consecutive new highs and has rallied more than $20 in one month.

Market bears are hoping that in the short term this week's supplies numbers "could dent the recent rally, but we would not hold our breath," said Edward Meir, an analyst at MF Global, in a research note.

The dollar on Wednesday fell to the lowest level against the euro, which hit a new high of $1.5524. See Currencies.

Crude prices, denominated in dollars, tend to rise when the greenback falls, as a weaker U.S. currency makes crude less expensive to buyers holding other currencies. It also eats into oil producers' dollar revenue and could prompt them to curtail production, thus adding more upward pressure on oil. See story on dollar and crude.

Also on Nymex, April reformulated gasoline fell slightly, to $2.7172 a gallon, and April heating oil rose to $3.0234 a gallon, up 2.77 cents.

April natural gas also rose slightly, changing hands at $10.005 per million British thermal units.

Increasing speculation

The gap between WTI crude, the underlying product of Nymex crude futures, and Brent oil, a type of crude typically refined in Northwest Europe, widened to more than $4 a barrel on Wednesday, an unusual gap reflecting growing speculative buying of the U.S. contract, an analyst said on Wednesday.

"We believe that this is evidence of increased buying by hedge funds in the U.S.," said Peter Hitchens, analyst at Seymour Pierce.

According to Hitchens, the traditional premium between WTI and Brent is in the range of $1 to $1.50 a barrel, which he said "normally reflects the transportation price of moving a barrel of Brent to the U.S."

Government data showed speculators and managers of large investment funds, those who don't need physical oil, dominated bets on rising oil prices, while refiners and other oil users were betting oil prices would move lower.

The latest data from the Commodity Futures Trading Commission showed long positions from speculators, in which investors expect oil prices to move higher, outnumbered short positions, or bets on lower prices, by nearly 100,000 contracts last week.

Net long positions more than tripled in one month. This was the fourth consecutive week marking an increase in net long positions from financial traders, and some analysts are expecting another build-up in this week's net long positions.

Inventories in detail

Crude inventories at Cushing, Okla., the delivery point for crude traded on the Nymex, rose sharply, increasing by 2.7 million barrels to a total of 18.9 million barrels, EIA said in the report.

EIA also reported U.S. gasoline supplies rose by 1.7 million barrels in the latest week, while distillate stocks fell by 1.2 million barrels. Analysts surveyed by Platts, an energy information provider, had been expecting that gasoline supplies would fall by 900,000 barrels and that distillate stocks would drop by 2 million barrels.

U.S. refineries operated at 85% of their operable capacity last week, down from the previous week's 85.9%. U.S. crude oil imports averaged 10.5 million barrels a day last week, up 1.1 million barrels a day from the previous week.