Crude futures dropped sharply Wednesday after the latest U.S. oil and fuel inventory data reversed the recent trend of tightening supplies that had helped send oil prices to a 15-month high last week.
Light, sweet crude for February delivery recently traded $1.95, or 2.4%, lower at $78.84 U.S. a barrel on the New York Mercantile Exchange. Brent crude on the ICE futures exchange traded $1.80 lower at $77.50 U.S. a barrel.
The U.S. Energy Information Administration reported across-the-board increases in oil and fuel inventories in the week ended Jan. 8, as well as a decline in products supplied, a proxy for demand.
Total oil and fuel inventories had fallen for five consecutive weeks, raising hopes that the glut built up in the first half of 2009 was easing.
But rising stockpiles in the first report of 2010 seemingly confirmed that recent declines stemmed from attempts to reduce onshore inventories for end-of-year tax considerations, rather than any improvement in demand.
"Large speculators who tried to run this market up to 15-month highs got caught here ... with fundamentals not justifying those prices," said Mike Zarembski, senior commodities analyst with OptionsXpress in Chicago.
Oil inventories rose 3.7 million barrels, compared with a one-million-barrel increase expected by analysts in a Dow Jones survey. Gasoline stocks increased 3.8 million barrels, against a one-million-barrel forecasted gain, while distillate stocks, including heating oil and diesel, rose 1.4 million barrels. Analysts had expected a decline of 1.8 million barrels.
The gains came as refiners raised their operating rate by 1.4 percentage points to 81.3% of capacity, while importing more oil and fuel. Demand wasn't there to soak up the extra supplies, as products supplied dropped 0.9% in the four weeks ended Jan. 8, however.
Oil prices initially plunged to $78.37 U.S. a barrel after the data release, the lowest the front-month contract has traded since Dec. 29. Futures have steadied since then, but could fall as low as $77.50 U.S. a barrel before becoming cheap enough to lure in bargain hunters, Zarembski said.
Front-month February reformulated gasoline blendstock, or RBOB, recently traded 5.85 cents, or 2.8%, lower at $2.0393 U.S. a gallon. February heating oil recently traded 6.23 cents, or 2.9%, lower at $2.0695 U.S. a gallon.
