Oil Closes Above $80 on New Storm Fear

Oil Refinery in California

Oil prices, which briefly dropped below $79 per barrel on Wednesday, jumped back up late in the afternoon to close over $80, as traders weighed a U.S. government report showing a surprise increase in the nation's crude inventories against concerns that a new storm could be brewing in the Gulf of Mexico, threatening production.

U.S. light, sweet crude for Novermber delivery dropped as low as $78.44 -- then jumped back up 77 cents to close at $80.30 per barrel.

In London, November delivery Brent crude fell $1.12 to $76.50 per barrel.

Oil prices had dropped sharply after the U.S. Energy Information Administrations said oil inventories in the world's biggest energy consumer rose by 1.8 million barrels last week, defying expectations for a decline.

"Everybody seems to have been caught by surprise by the crude stock build, but now people are watching a tropical depression that will be named Lorenzo when it becomes a tropical storm," said Phil Flynn of Alaron Trading in Chicago.

The increase in stockpiles came as imports notched higher and domestic refinery activity slumped to its lowest level since last March as companies shut plants for seasonal maintenance work.

Gasoline stocks, meanwhile, rose 600,000 barrels, while distillates inventories climbed 1.6 million barrels, the EIA said in the weekly report.

"The surprise build on crude stocks is indicative of the demand/supply situation and is a little bit more bearish than what people had been anticipating," said Kyle Cooper, research director at IAF Advisors in Houston. "What it tells you is that $80 a barrel crude oil is not sustainable."

Oil has fallen from last Thursday's all-time high of $83.90, which was a reaction to supply outages due to a storm in the Gulf of Mexico, a weakening dollar, U.S. interest rate cuts and an influx of speculative money.

The return of nearly all U.S. Gulf oil production after precautionary closures last week had pushed oil below $80 on Wednesday.

The market also came under pressure from profit taking as the third quarter drew to a close.

"Given the very strong performance of commodities compared to other financial instruments, we would not exclude that some of the commodity profits are being cashed in to the bank for the quarterly accounting books," said Olivier Jakob of Petromatrix.

Traders continued to keep an eye on weather as the U.S. National Hurricane Center said Tropical Storm Karen had formed in the eastern Atlantic Ocean and a tropical depression had formed in Mexico's Bay of Campeche.

Neither was expected to affect energy operations.