Oil Drops as Growing Supply Undermines Biggest Gain in a Week

By Grant Smith

Nov. 26 (Bloomberg) -- Oil fell in New York on speculation that its biggest advance in a week wasn’t supported by U.S. inventory levels, which rose to a four-week high.

U.S. stockpiles increased to 337.8 million barrels in the week to Nov. 20, the Energy Department said in a report yesterday. Oil still closed 2.6 percent higher as the dollar slumped to a 15-month low against the euro, stimulating demand for commodities as a currency hedge.

“On the fundamental side, it’s not justified for oil prices to go higher,” said Gerrit Zambo, a trader with Bayerische Landesbank in Munich. “Even with a cold winter there wouldn’t be any problem with supply as storage is so full and demand isn’t as high as two years ago.”

Crude oil for January delivery fell as much as $1.11, or 1.4 percent, to $76.85 a barrel in electronic trading on the New York Mercantile Exchange. The contract was at $77.13 a barrel at 10:55 a.m. London time.

Yesterday, it rose $1.94 to $77.96 a barrel. Futures have gained 73 percent this year.

There will be no floor trading in New York today because of Thanksgiving. Electronic trading will continue during the holiday.

“With the U.S. on holiday today, both the upper side and lower side should be limited,” said Ken Hasegawa, a commodity derivatives sales manager at Newedge in Tokyo. “We cannot expect further gains today.”

Dollar Index

The Dollar Index, which tracks the greenback against the currencies of six trading partners, rose 0.3 percent to 74.519 after it reached a 15-month low yesterday on speculation the U.S. will keep interest rates near zero.

The U.S. currency yesterday fell to $1.5144 against the euro, the lowest since August 2008, amid speculation the Federal Reserve will keep interest rates low. A European Commission report tomorrow may show executive and consumer confidence rose to the highest in 14 months. A weaker dollar bolsters the investment appeal of commodities.

U.S. gasoline inventories increased to 210.1 million barrels last week as imports rose and refiners boosted output, Energy Department data showed.

Distillate fuel supplies, which include heating oil and diesel, dropped for a second week to 166.9 million barrels even as consumption stagnated.

“The decline in distillate demand has narrowed a tad,” analysts at Barclays Capital, led by Paul Horsnell, said in a report after yesterday’s release of weekly Energy Department data. “It is still a bit too early to say that U.S. diesel demand has turned the corner.”

Brent crude oil for January delivery on the London-based ICE Futures Europe exchange fell as much as 89 cents, or 1.1 percent, to $77.55 a barrel. The contract traded at $77.85 a barrel at 10:47 a.m. in London. Yesterday, it rose 2.6 percent, the most since Nov. 16, to $78.44 a barrel.

To contact the reporter on this story: Yee Kai Pin in Singapore at kyee13@bloomberg.netGrant Smith in London at gsmith52@bloomberg.net