In trading that saw rumors of war overwhelm reason, oil prices topped $39 a barrel and closed up sharply Wednesday. But prices are expected to fall now that President Bush has said he will tap the Strategic Petroleum Reserve in an attempt to calm frenzied oil markets.
Crude oil for November delivery surged $1.14 to finish at $38.67 a barrel, the latest in a string of record closing prices in the last week and the highest close since crude futures began trading on the New York Mercantile Exchange in 1983.
The high during the trading day was $39.05, just short of the previous high of $39.20 reached on Monday.
Meanwhile, a new survey showed that the average retail price of regular unleaded gasoline in California rose 6 cents in the last month to $1.372 a gallon, defying normal seasonal trends. The survey of 600 California stations by the California State Automobile Assn. also found price variations of as much as 45 cents a gallon between different stations for the most popular grade of motor fuel.
On the New York Mercantile Exchange on Wednesday, crude oil prices opened lower and traded as low as $36.48 in reaction to American Petroleum Institute statistics released the day before showing ample supplies of crude, gasoline and heating oil.
The API, the oil industry's main trade group, reported Tuesday that U.S. crude stocks of 364 million barrels in the week ending Sept. 21 were down slightly from the week before but remained 33 million barrels above the level of a year ago. Stocks of both gasoline and distillates, which include home heating oil, were above week-ago and year-ago levels.
But fear soon overcame economic fundamentals Wednesday, and prices quickly rallied as Persian Gulf-related rumors drifted across the trading floor. The first was that an Iraqi jet had been shot down over the Persian Gulf; the next, that the United States had given an ultimatum to Iraq to get out of Kuwait within 48 hours, and the last, that Iraqi troops had stormed the U.S. Embassy in Kuwait City.
All of the rumors turned out to be unfounded, though Secretary of State James A. Baker III did confirm later that Iraq had demanded a list of non-diplomats who have taken refuge in the U.S. Embassy and threatened to hang some of them.
"We come back to the problem: Which is more important? The fundamentals of supply and demand, or rumors and psychology?" asked Peter Beutel, an oil analyst at Pegasus Econometric Group Inc. in Hoboken, N.J. "This morning, it was the fundamentals. This afternoon, it was psychology."
Crude oil for delivery in months after November also closed up, and traders and analysts again saw oil markets, which had appeared to peak Tuesday, testing the $40-per-barrel limit and remaining nervous in the absence of a material change in the Middle East crisis.
But prices could fall sharply today. After markets closed Wednesday, Bush said he would tap 5 million barrels of the 590-million-barrel Strategic Petroleum Reserve.
Refined products closed mixed Wednesday. Unleaded gasoline for October delivery initially fell sharply in reaction to the API figures. They showed national gasoline inventories at 222.3 million barrels, 5.3 million barrels above the level of a week ago and 3 million barrels ahead of last year as the summer driving season comes to an end.
But October gasoline gained back some of its losses and closed down 1.95 cents at $1.001 per gallon. Gasoline for later delivery closed up.
Heating oil for October delivery closed up 1.37 cents at $1.0257. Heating oil in later months closed up much higher in anticipation of winter demand: December heating oil was up 2.48 cents at $1.0477 a gallon.