Oil Trades Near $66 After Falling on Supply Gain, Fuel Demand

By Ben Sharples and Ann Koh

June 4 (Bloomberg) -- Crude oil was little changed near $66 a barrel after falling the most in two weeks yesterday as a government report showed that U.S. supplies unexpectedly increased when fuel consumption plunged to a 10-year low.

Fuel demand in the world’s largest energy user fell 900,000 barrels to 17.7 million barrels a day last week, the biggest drop since Jan. 9, the report showed. Gasoline consumption slipped 518,000 barrels to 9.02 million, the biggest decline since January 2005.

“There was a demand increase prior to the Memorial Day holiday last week, after which demand dropped,” Victor Shum, a senior principal at Purvin & Gertz Inc., said in Singapore. “That’s not a good sign as we’re in the beginning of the driving season.”

Crude oil for July delivery was at $66.28 a barrel, down 16 cents, on the New York Mercantile Exchange at 11:07 a.m. in Singapore after falling as much as 20 cents, or 0.3 percent. Yesterday, the contract fell $2.43, or 3.5 percent, to settle at $66.12 a barrel, the biggest decline since May 15.

U.S. gasoline stockpiles fell 215,000 barrels to 203.2 million last week, the report showed. A 650,000-barrel increase was forecast in the Bloomberg News survey.

The peak U.S. gasoline demand period lasts from late May’s Memorial Day holiday until Labor Day in early September as Americans take to the highways for vacations.

U.S. Stockpiles

Crude inventories climbed 2.9 million barrels to 366 million in the week ended May 29, according to the Energy Department. The gain occurred as imports surged 9.9 percent and refineries increased operating rates to the highest level in six months. Fuel demand fell to the lowest since May 1999.

The Energy Department report was forecast to show that crude-oil stockpiles fell 1.5 million barrels, according to the median of 15 estimates by analysts surveyed by Bloomberg News.

“An increase in inventory levels and oil imports helped push the price lower,” said Mike Sander, an investment adviser at Sander Capital Advisors Inc. in Seattle. “Technically oil cannot go up forever, so at some point there has to be a pull back in the marketplace.”

Prices jumped $7.53 between May 21 and June 1, the longest rally in a year, amid a weaker dollar and signs of recovery in the global economy.

Bernanke’s Comments

Oil also fell as the dollar gained yesterday, reducing investor interest in commodities as an inflation hedge. The Dollar Index yesterday rose by the most in more than four months as Federal Reserve Chairman Ben S. Bernanke said the Federal Reserve won’t finance government spending over the long term.

“Chairman Bernanke’s sober words helped drop the S&P 500 by over 2 percent at times during the day, helping put pressure on oil to trade lower,” Sander said. The S&P 500 declined 1.4 percent and the Dow Jones Industrial Average 0.8 percent.

The MSCI Asia Pacific Index fell 0.7 percent to 104 as of 10:04 a.m. in Tokyo, ending a four-day, 4.6 percent advance.

Gasoline for July delivery fell as much as 0.76 cents to $1.8940 a gallon on the New York Mercantile Exchange. It was at $1.906 a gallon at 9:46 a.m. in Singapore.

Refineries operated at 86.3 percent of capacity, up 1.2 percentage points from the previous week and the highest since the week ended Dec. 5, the report showed.

In addition to supplies on land, traders have kept as much as 100 million barrels of crude oil on tankers. BP Plc, Royal Dutch Shell Plc and Hess Corp. were among oil companies whose first-quarter earnings were boosted by storing crude in tankers. By anchoring vessels offshore, companies were able to profit from the so-called contango, in which oil contracts for delivery in the future are more expensive than near-term supply.

Brent crude for July delivery was at $66.18 a barrel, up 30 cents, on London’s ICE Futures Europe exchange at 11:07 a.m. in Singapore. It dropped $2.29, or 3.4 percent, to end yesterday’s session at $65.88 a barrel, the biggest decline since April 20.

To contact the reporters on this story: Ben Sharples in Melbourne bsharples@bloomberg.net; Ann Koh in Singapore at akoh15@bloomberg.net.