Oil Falls on Concern Demand Drop May Outweigh OPEC Output Cuts

By Christian Schmollinger and Samantha Zee

Feb. 20 (Bloomberg) -- Crude oil fell, paring its largest gain in seven weeks, on concern that the decline in global fuel demand will outweigh production cuts by OPEC.

Oil jumped 14 percent yesterday after a U.S. Energy Department report showed inventories dropped 138,000 barrels to 350.6 million barrels last week, the first decline this year. Crude imports to the U.S. fell 8.9 percent. The International Energy Agency, OPEC and the Department have all cut their forecasts for 2009 oil demand because of the global recession.

“The bearish picture for crude oil consumption is still in place with the slowing of the global economy,” said Mike Sander, an investment adviser at Sander Capital Advisors Inc. in Seattle. “There are just limited reasons why crude oil should go up in price, unless imports slow even further, which is extremely doubtful due to huge budget imbalances in OPEC and non-OPEC exporting countries.”

Crude oil for March delivery fell as much as 93 cents, or 2.4 percent, to $38.55 a barrel in electronic trading on the New York Mercantile Exchange at 2:14 p.m. Singapore time. The contract rose $4.86 to settle at $39.48 a barrel yesterday. Prices are down 13 percent this year.

The March contract expires tomorrow. The more-active April contract was at $39.22 a barrel, down 96 cents, after rising 7.4 percent to $40.18 a barrel yesterday.

Brent crude oil for April settlement fell as much as 77 cents, or 1.8 percent, to $41.22 a barrel on London’s ICE Futures Europe exchange. It was at $41.30 a barrel at 3:05 p.m. in Singapore. It rose 6.2 percent to $41.99 a barrel yesterday.

Build Forecast

Analysts had forecast a build in U.S. crude inventories of 3.2 million barrels, according to a Bloomberg News survey. Stockpiles had gained in 18 out of the 20 previous weeks.

“The market has been used to seeing bigger-than-expected builds in U.S. supplies each week and to get an actual negative number gave the market a fresh dose of optimism,” said Mark Pervan, a senior commodity strategist at Australia and New Zealand Banking Group Ltd. in Melbourne. “Still I can’t see anything that’s shown the demand in the market has started to pick up. I think it’s just a matter of limiting supply.”

The IEA on Feb. 11 projected 2009 oil demand will fall by 1 million barrels a day to 84.7 million a day because of a weaker outlook from the International Monetary Fund. The Organization of Petroleum Exporting Countries on Feb. 13 lowered its estimate for this year by 530,000 barrels a day to 85.13 million barrels a day.

U.S. imports of crude dropped 859,000 barrels a day to 8.79 million, the lowest level since September, when ports were shut in the aftermath of hurricanes Gustav and Ike, the report showed.

Cushing Supplies

Supplies at Cushing, Oklahoma, where New York-traded West Texas Intermediate crude is delivered, declined 52,000 barrels to 34.9 million barrels, the report said. Inventories in the week ended Feb. 6 were the highest since at least April 2004, when the department began keeping records for the location.

The price of oil for delivery in April is 62 cents a barrel higher than for March, down from an $8.19 premium on Feb. 12. The spread between the first- and second-month contracts is the lowest since Nov. 20. December futures are $10.03 higher than the front-month contract, versus $10.06 yesterday.

The situation where the front-month contract is less than the later-dated futures is known as contango and suggests a lack of demand for oil. The structure encourages storing crude to be resold at a later date.

“ A lot of traders have been stockpiling crude for the higher prices one to two months out,” said ANZ’s Pervan. “Now that the spread is starting to narrow that game is starting to lose momentum.”

Gasoline Inventories

Gasoline inventories rose 1.11 million barrels to 218.7 million barrels, the Energy Department said. Stockpiles were forecast to fall by 500,000 barrels, according to the median of responses by 16 analysts in the Bloomberg News survey.

Supplies of distillate fuel, a category that includes heating oil and diesel, dropped 813,000 barrels to 140.8 million, the department said. A 1.5 million-barrel decline was forecast.

Fuel demand during the past four weeks averaged 20 million barrels a day, down 0.1 percent from the average over the same period last year, the report showed. Gasoline consumption averaged 8.9 million barrels a day over the past four weeks, up 0.8 percent from a year earlier.

Gasoline futures for March delivery fell 2.86 cents to $1.07 a gallon in New York today, after climbing 3.34 cents, or 3.1 percent, to settle at $1.0986 a gallon yesterday.

Heating oil for March delivery lost 1.88 cents to $1.1857 a gallon today. Yesterday, heating oil futures added 5.76 cents, or 5 percent, to end the session at $1.2045 a gallon.

To contact the reporters on this story: Christian Schmollinger in Singapore at christian.s@bloomberg.net; Samantha Zee in Los Angeles at szee@bloomberg.net.