Oil Falls on Bigger-Than-Expected Inventory Gain, Lower Demand

By Mark Shenk and Samantha Zee

Jan. 8 (Bloomberg) -- Oil futures dropped for a third day after a U.S. government report showed bigger-than-expected gains in supplies of crude, gasoline and distillate fuel as consumption dropped.

Inventories of crude oil rose 6.68 million barrels to 325.4 million barrels last week, the highest since May, the Energy Department said yesterday in a weekly report. Supplies were forecast to increase by 800,000 barrels, according to the median of forecasts by 14 analysts in a Bloomberg News survey.

“We have the making of a huge glut here,” said Phil Flynn, senior trader at Alaron Trading Corp. in Chicago. “Supplies are more than adequate and should continue to rise because demand is so poor.”

Crude oil for February delivery fell as much as 39 cents, or 0.9 percent, to $42.24 a barrel on the New York Mercantile Exchange, and was at $42.37 at 7:48 a.m. Singapore time.

Yesterday, futures dropped $5.95, or 12 percent, to $42.63 a barrel, the lowest settlement since Dec. 30. The decline was the biggest since Sept. 24, 2001. Futures on the exchange are down 55 percent from a year ago.

Inventories at Cushing, Oklahoma, where oil that’s traded on Nymex is stored, climbed 14 percent to 32.2 million barrels last week, the highest since at least April 2004, when the department began keeping track of supplies there.

“We’re pushing up toward capacity limits,” said Lawrence Eagles, global head of commodities research at JPMorgan Chase & Co. in New York. “There’s still a bit of space, but not much.”

Contango

The price of oil for delivery in February 2010 is 41 percent more than for the current month, increasing the opportunity for traders to profit. This structure, in which the subsequent month’s price is higher than the one before it, is known as contango. Contango trading encourages companies to increase stockpiles if they have available storage.

“It’s not a surprise we’re building inventories,” said Tom Knight, trading director at Truman Arnold Cos. in Texarkana, Texas. “Look at the contango. You’d be an idiot not to take advantage of that.”

Volume in electronic trading on the exchange was 535,890 contracts as of 3:05 p.m. in New York yesterday. Volume totaled 649,999 contracts on Jan. 6, up 38 percent from the average over the past 3 months. Open interest on Jan. 6 was 1.22 million contracts. The exchange has a one-business-day delay in reporting open interest and full volume data.

Gasoline inventories rose 3.33 million barrels to 211.4 million barrels, the department said. Supplies were forecast to increase by 1 million barrels. Distillate supplies, which include heating oil and diesel, climbed 1.79 million barrels to 137.8 million barrels. A gain of 1.1 million barrels was forecast.

Fuel Prices

Gasoline futures for February delivery dropped 11.28 cents, or 9.5 percent, to settle at $1.0764 a gallon in New York. Heating oil for February delivery fell 8.32 cents, or 5.1 percent, to end the session at $1.5431 a gallon.

Regular gasoline at the pump, averaged nationwide, rose 3.9 cents to $1.727 a gallon, AAA, the largest U.S. motorist organization, said on its Web site today. It was the biggest one- day increase since September. Prices have dropped 58 percent from the record $4.114 a gallon reached on July 17.

U.S. fuel consumption during the four weeks ended Jan. 2 averaged 20.1 million barrels a day, down 2.9 percent from a year earlier, the Energy Department report showed.

Imports of crude oil increased 13 percent to 10.5 million barrels a day last week, the biggest one-week gain since the week ended Oct. 3, when the Gulf Coast was recovering from hurricanes Gustav and Ike.

Refineries operated at 84.6 percent of capacity last week, up 2.1 percentage points from the week before, the report showed. Analysts forecast that there would be no change in utilization.

Geopolitical Tension

Earlier this week, crude reached a five-week high on the conflict between Israel and Hamas in the Gaza Strip, Russia’s gas dispute with Ukraine, and signs that OPEC members are enacting supply cuts. It later fell as manufacturing data indicated the U.S. recession is deepening.

The U.S. inventory numbers “are obviously quite dramatic, but should not really have been a surprise,” Eagles said. “There are significant issues in the Middle East and concerning gas in Europe, but how long will they remain a major worry?”

Brent crude oil for February settlement declined $4.67, or 9.2 percent, to settle at $45.86 a barrel on London’s ICE Futures Europe exchange.

Saudi Foreign Minister Prince Saud al-Faisal said oil “isn’t a weapon” to end fighting in the Middle East. Prince al- Faisal, speaking at a press conference in New York, said oil “can’t reverse a conflict,” when asked about an Iranian call for Arab states to stop producing as a means of putting pressure on countries backing Israel.

Oil surged in 1974, helping spur a recession in the developed world, after an oil embargo that followed the Arab- Israeli war in October 1973.

Weak Economy

“The violence in Gaza and the natural-gas crisis in Europe aren’t enough to keep the rally going when the economy is so weak,” said Gene McGillian, an analyst at Tradition Energy in Stamford, Connecticut. “It looks like the $50 area will be the top of our range.”

Frontline Ltd., the world’s biggest owner of supertankers, said oil traders want to charter as many as 10 vessels to hold crude to take advantage of higher prices later in the year.

About 25 supertankers were already hired for storage and there are inquiries for 5 to 10 more, Jens Martin Jensen, Singapore-based interim chief executive officer of the company’s management unit, said by phone today.

To contact the reporter on this story: Mark Shenk in New York at mshenk1@bloomberg.net; Samantha Zee in Los Angeles at szee@bloomberg.net.