Oil futures reclaim $135 as output concerns persists....

SAN FRANCISCO (MarketWatch) -- Crude-oil futures climbed Tuesday to reclaim the $135-a-barrel level, rebounding after a steep decline in the previous session as traders weighed concerns about global production against expectations for a slowdown in demand.


"The familiar divide -- higher on supply worries, lower on demand concerns -- is setting the tone again," said Michael Fitzpatrick, an analyst at MF Global, in a note to clients.
Crude oil for July delivery climbed as high as $137.98 a barrel in electronic trading on Globex. It's pulled back a bit to trade at $135.34, up 99 cents on the New York Mercantile Exchange.
The secretary general of the Organization of the Petroleum Exporting Countries, Abdalla Salem el-Badri, told Reuters Tuesday at the Reuters Global Energy Summit that the record-high oil price was "unbearable" and "there is no shortage now and in the future."
"We are not happy with the current level of price for one reason. It has nothing to do with the fundamentals," he said at the summit.
El-Badri also told Dow Jones on Tuesday that OPEC didn't plan to move against speculators that it blames for the record surge in oil prices.
He said the oil cartel has "very reasonable" spare capacity of 3 million barrels a day, according to a Dow Jones report.
Reports of more violence in oil-rich Nigeria helped support oil prices Tuesday. The BBC reported that Nigerian militants have killed a sailor in the second attack on navy ships patrolling the Niger Delta region. Four people were injured in the attack on a ship protecting a vessel belonging to Canadian company Addax Petroleum, the BBC reported.
"There are a lot of little stories that got the market a little nervous," said Phil Flynn, vice president at Alaron Trading in Chicago. "It's very sensitive and ready to run up."
On Monday, crude dropped $4.19 to close at $134.35 a barrel on the Nymex after touching a low of $133.95. The decline followed oil's unprecedented surge of nearly $11 a barrel to record levels on Friday.
IEA cuts demand forecast
Oil prices rebounded Tuesday even as the International Energy Agency lowered its forecast for average global oil product demand in 2008 to 86.8 million barrels a day, down 80,000 barrels a day from its estimate last month.
The decline followed the reduction of price subsidies in several countries which are not part of the group of industrialized nations called the Organization for Economic Cooperation and Development, the IEA said. Global oil supply rebounded in the May report by 490,000 barrels a day to average 86.6 million barrels a day, boosted by higher OPEC crude supply.
The increase, however, follows extensive downward revisions to first-quarter non-OPEC production. OECD oil stocks fell 8.1 million barrels in April to 2.562 billion, "in stark contrast to the typical build," IEA said. Total oil cover remains "above average" at 53.4 days, IEA said.
The IEA "which cut its demand growth the slowest rate since 2002, also cut expectations for supply growth, as well," said Fitzpatrick.
OECD stocks fell at a time when they should be building, he said. "So, while market participants are starting to recognize that economic deterioration has begun, supply may be stretched more than producers contend," he said.
Bigger Picture
Taking a look at the bigger picture, "it is becoming more clear each day that under current conditions, we are peaking in oil production worldwide," said Charles Perry, president of Perry Management, an energy-consulting firm.
"The U.S. is essentially shut down on any further oil development, but the world['s] government-owned oil companies are not doing a good job in managing their production so [there's] not much possible for new production," he said.
Still, there's "a lot of potential if it is unleashed," including the potential for the U.S. to open up ANWR, the Arctic National Wildlife Refuge, he said.
In the meantime, prices for petroleum products edged higher to follow crude Tuesday. July reformulated gasoline rose 2 cents at $3.419 a gallon and July heating oil gained 5 cents at $3.923 a gallon.
The average retail prices in the U.S. for a gallon of regular gasoline surpassed $4 on Sunday for the first time ever. See full story. It stood at $4.043 on Tuesday, 31.2% higher than a year ago, according to AAA's Daily Fuel Gauge Report.
In a weekly report, the Energy Information Administration, the reporting arm of the Energy Department, said the average retail price for a gallon of regular gasoline climbed to $4.039 for the week ended June 9. That's up over 12% from the week ended April 28.
The energy market looked ahead to Wednesday's data on petroleum supplies from the EIA. Analysts at MF Global expect the data to show that crude supplies fell 600,000 barrels for the week ended June 6. Distillates likely rose by 1.1 million, while motor gasoline inventories likely rose by 300,000 barrels, they said.
Analysts polled by Platts expect to see a decline of 1.4 million barrels in crude supplies as well as increases in distillates of 1.7 million and gasoline of 1.1 million. The survey also showed that the market's expecting a rise in refinery utilization of 0.6% to 90.3% of capacity for last week.
July natural gas futures tacked on 7 cents to $12.675 per million British thermal units, after trading as high as $12.68. The EIA's update on natural-gas supplies will be released on Thursday.
Rounding out Tuesday's trading, energy equities edged lower. The Amex Natural Gas Index ($XNG:
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Myra P. Saefong is MarketWatch's assistant markets editor, based in San Francisco.Polya Lesova is a MarketWatch reporter based in New York.