Oil Rises to One-Week High as U.S. Floods Counter China Concerns

Oil climbed tothe highest in a week in New York as speculation flooding on the Mississippi River will disrupt U.S. fuel supplies countered concern demand may falter in China, the world's second-largest crude consumer.

Futures rose as much as 0.7 percent as the flood moved south from Memphis, threatening refineries and shipping traffic, and after a report showed U.S. gasoline inventories fell to the lowest since September 2009. Prices earlier fell as much as 0.5 percent after China's inflation exceeded the government's target, stoking speculation the central bank will raise interest rates to cool the economy.

"The market has been rallying the past two days and now may be in a consolidation phase so with the China data coming out that sparked a sell-off," said Serene Lim, an energy and commodity strategist at Australia & New Zealand Banking Group Ltd. in Singapore. "The markets remain very jittery and traders will err on the side of caution."

Crude for June delivery gained as much as 72 cents to $104.60 a barrel in electronic trading on the New York Mercantile Exchange. It was at $104.03 at 3:09 p.m. Singapore time. Yesterday, the contract rose 1.3 percent to $103.88, the highest since May 4. Prices are up 37 percent in the past year.

Brent crude for June settlement on the London-based ICE Futures Europe exchange increased as much as 80 cents, or 0.7 percent, to $118.43 a barrel. Yesterday, it gained 1.5 percent to $117.63, the highest settlement since May 4.

China Inflation

China's consumer prices climbed 5.3 percent in April from a year earlier, according to the statistics bureau in Beijing. That's higher than the government's 4 percent full-year target and above the 5.2 percent median forecast in a Bloomberg News survey of economists.

The country's central bank will increase interest rates once more this year, adding to four since mid-October, another Bloomberg News survey showed. Officials have boosted banks' reserve requirements and reined in credit growth from record levels in 2009 and 2010.

U.S. gasoline futures climbed 3.1 percent yesterday as flooding on the Mississippi River threatened refineries and shipping. A total of 11 plants, accounting for 13 percent of U.S. fuel output, are located between New Orleans and Baton Rouge, according to Lipow Oil Associates LLC in Houston.

The river is holding just below 48 feet (14.6 meters) in Memphis, Tennessee. Three million acres, an area almost the size of Connecticut, may go under water as the flooding moves south, Louisiana Governor Bobby Jindal said at a press conference in Baton Rouge, the state capital.

Morganza Spillway

Valero Energy Corp., the largest U.S. refiner, reduced operations at its Memphis plant to between 80 percent and 85 percent of capacity because of flooding, according to people familiar with operations. The plant has a capacity of 195,000 barrels a day.

To relieve the threat to New Orleans and Baton Rouge, the Army Corps of Engineers may open the Morganza Spillway. Opening the spillway halfway would inundate a swath of central Louisiana along the Atchafalaya River with 5 feet to 20 feet of water.

That would affect two refineries, according to Jindal's office. One plant on the river may have capacity cut to 75 percent for two weeks, according to the state's Department of Natural Resources yesterday. Anna Dearmon, the DNR's communications director, said she couldn't release the names of the refineries because of security reasons.

Alon USA Energy Inc.'s Krotz Springs plant will be affected if the spillway is opened, Lisa Vidrine, director of the St. Landry Parish office of emergency preparedness, said in a telephone interview yesterday. Refinery officials said May 9 that they were doing engineering work on the possible building of a levee to protect the refinery, according to Vidrine.

Gasoline Stockpiles

The 104,532 metric-ton tanker Zaliv Baikal was prevented from delivering crude to Exxon Mobil Corp.'s Baton Rouge refinery because of concern the ship wouldn't fit under the Interstate 10 bridge spanning the Mississippi River.

U.S. gasoline stockpiles probably fell 750,000 barrels in the week ended May 6, according to the median estimate of 17 analysts polled by Bloomberg News before an Energy Department report today. Supplies have fallen 11 weeks, the longest stretch of decline since April 2007. Yesterday, the industry-funded American Petroleum Institute said inventories shrank 1.8 million barrels to 209.5 million. Supply disruptions after May 6 won't be reflected in today's report.

The peak gasoline demand period starts after the Memorial Day holiday in late May and ends on Labor Day in early September. The holidays fall on May 30 and Sept. 5 this year.

U.S. crude stockpiles climbed 2.95 million barrels last week to 367.2 million, the API said. The Energy Department's report may show supplies rose 1.5 million barrels, based on the Bloomberg News survey.

July $115 Call

The most-active oil option was the July $115 call, which gives investors the right to buy crude for July delivery at $115 a barrel. The contract rose 15 percent to $1.44 after more than doubling on May 9. Oil presents a "short-term buying opportunity" because of constraints to supply and growing demand, according to Bank of America Merrill Lynch.

Brent, the European and African benchmark, has rallied 25 percent this year as unrest in the Middle East and North Africa toppled leaders in Tunisia and Egypt, disrupting exports from Libya.

North Atlantic Treaty Organization jets intensified strikes on the Libyan capital of Tripoli, including what the alliance identified as "command-and-control" bunkers from which Libyan leader Muammar Qaddafi is carrying out a campaign against rebels.

Brent traded at a premium of $13.97 a barrel to U.S. futures, the highest since April 18. The difference between front-month contracts in London and New York surged to a record $19.54 on Feb. 21. It averaged 76 cents last year.