Oil Rises After Industry Report Shows Drop in Crude Inventories

By Christian Schmollinger and Ben Sharples

July 1 (Bloomberg) -- Oil rose above $70 a barrel after an industry report showed the biggest decline in crude inventories since September in the U.S., the world’s biggest consumer.

Oil reversed some of yesterday’s 2.2 percent loss after the industry-funded American Petroleum Institute said crude supplies fell 6.8 million barrels to 349.7 million last week. A U.S. Energy Department report today will probably show crude-oil stockpiles declined 2 million barrels, according to the median of 15 estimates in a Bloomberg News survey.

“Because of the bullish factor of the big drop in the API oil inventories the market has now rebounded to $70,” said Ken Hasegawa, a commodity derivatives sales manager at broker Newedge in Tokyo. “The EIA data tonight will give better direction to the market.”

Oil for August delivery gained as much as 86 cents, or 1.2 percent, to $70.75 a barrel on the New York Mercantile Exchange, and was at $70.48 at 2:45 p.m. Singapore time. Oil dropped from an eight-month high yesterday after a decline in June U.S. consumer confidence.

“A fall in crude inventories will cause the market to move higher,” said Mike Sander, an investment adviser with Sander Capital in Seattle. Should the government report also show a decline, “it will reinforce crude to stay at or go above current levels,” he said.

Oil in New York posted a 41 percent quarterly gain, the biggest since 1990. Prices have rallied as rebounding world equity markets and a weaker dollar encouraged investors to buy the commodity as an alternative investment.

The U.S. currency traded at $1.4037 versus the euro at 2:39 p.m. in Singapore, following a 0.4 percent gain yesterday.

Fuel Supply

The Energy Department report, due at 10:30 a.m. in Washington, will probably show that U.S. fuel inventories rose last week and gasoline supplies climbed 2 million barrels, according to the Bloomberg survey. Stockpiles of distillate fuel, a category that includes heating oil and diesel, increased 1.5 million barrels.

The API collects stockpile information on a voluntary basis from operators of refineries, bulk terminals and pipelines. The government requires that reports be filed with the energy Department for its weekly survey.

Oil-supply totals from the API and DOE moved in the same direction 76 percent of the time over the past four years, according to data compiled by Bloomberg.

Gasoline for August delivery gained as much as 2.57 cents, or 1.4 percent, to $1.9277 a gallon. Yesterday, it declined 3.34 cents, or 1.7 percent, to end the session at $1.9020 a gallon in New York. U.S. gasoline inventories rose 209,000 barrels last week, the API said yesterday.

Crack Spreads

Refiners have more incentive to produce gasoline as the so- called crack spread, or profit margin, for the fuel is at $10.02 a barrel today. That’s higher than the income a processor could make on producing diesel fuel, at $5.09 a barrel.

Refinery utilization remained unchanged at 85 percent of capacity last week, the API said. The Energy Department said on June 24 processing rates climbed 1.15 percentage points to 87.1 percent in the week ended June 19.

“The operation rate of the refineries could be increased because of the healthy gasoline margin,” said Newedge’s Hasegawa.

Brent crude oil for August settlement rose as much as 90 cents, or 1.3 percent, to $70.20 a barrel on London’s ICE Futures Europe exchange. It was at $69.90 a barrel at 2:48 p.m. Singapore time.

China’s manufacturing expanded for a fourth month as government stimulus spending and record bank lending sparked a recovery in the world’s third-biggest economy.

The Purchasing Managers’ Index rose to a seasonally adjusted 53.2 in June from 53.1 in May, the Federation of Logistics and Purchasing said today in Beijing. A reading above 50 indicates an expansion. China is the largest crude oil user after the U.S.

To contact the reporters on this story: Christian Schmollinger in Singapore at christian.s@bloomberg.net; Ben Sharples in Melbourne at bsharples@bloomberg.net.