Gusher of supply keeps pounding oil prices

A tidal wave of U.S. gasoline and diesel supply is weighing on already weak oil prices, driving crude back toward $30 per barrel — and below.

At the same time, U.S. government data show no slowdown in the nation's oil production — at 9.23 million barrels a day last week, up slightly from 9.22 million barrels the week earlier.

While the gasoline glut and growing oversupply of diesel should lower pump prices even further for drivers and truckers, the build in truck fuel is also coinciding with a sharp drop-off in the stocks of transport companies, now at a two-year low.

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"We know diesel demand is down because of lower shale (drilling) activity, and the portion of distillate demand that goes for heating is going down because it's so warm," said Tom Kloza, global head of energy analysis at Oil Price Information Service. "This is one thing that's a red flag. I don't think we're in a recession, but these numbers are poor enough."

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The Energy Information Administration on Wednesday reported a shockingly large build of both gasoline and distillates for a second week. Gasoline stockpiles rose by 8.4 million barrels, after the previous week's jump of 10.6 million barrels — an unheard of two-week build. Stockpiles of distillates, including diesel and heating oil, rose 6.1 million barrels, triple what was expected.

Diesel demand dropped to 2.8 million barrels a day last week, from 3 billion barrels a day the week earlier, and 3.9 million barrels a day a year ago.

Besides the refined production build, crude stocks at the Cushing, Oklahoma, delivery hub rose by 97,000 barrels. Crude inventories increased by 234,000 gallons, well below expectations.

Citigroup energy analyst Eric Lee said the gasoline build may be a technical issue and not really amount to the stockpiling it appears to be. Lee said the EIA remarked there may have been a seasonal slowdown in blending activity and it could be the result of more production of unfinished gasoline at terminals.

He said if that reverses, supply levels could return to normal. But in the meantime, there could still be a retail price drop from the current national average of $1.94 per gallon of unleaded. "It's definitely moving more along the trajectory of the bear case we've been outlining," said Lee of oil prices. Citigroup has said prices could temporarily drop into the $20s before moving higher.

"There's not great oil demand data points, China macro concerns and I guess to some degree continued strength of the U.S. dollar — all these things have provided headwinds for oil prices. i think it's a growing recognition that supply is still very resilient. Demand is not great and inventories are likely to keep getting quite a bit higher."

West Texas Intermediate crude futures settled Wednesday at $30.48 per barrel, actually up 4 cents, and Brent futures settled at $30.31. WTI had been up 3 percent before the EIA data, on reports of strong Chinese oil demand in December. Brent had slipped as low as $29.96 Wednesday, its lowest level since 2004.

"Thirty dollars was key psychological support which will make market sentiment more negative and drive us lower still if it's broken," said John Kilduff, partner at Again Capital. "We're knocking on the door. This is the classic type of test it, then bounce. Test it, then bounce."

"There's some support at $27.30," he said. After that level, WTI futures could see some support at $23, and then $18 is a potential floor.

Kloza said he is cutting his forecast for retail gasoline prices for the next month to $1.70 to $1.90 per gallon from $1.75 to $1.95 because of the gasoline inventory build.

"For spot markets today, right now gasoline is down 2 cents in New York, 5 cents at the Gulf Coast, and that is of course the biggest gasoline market," said Kloza. He said oil was 9 cents per gallon lower in California, and down 5 cents in the Chicago spot market.

"I am looking at numbers I have not seen on my screen for gasoline since the first quarter of 2009," he said. "If these numbers were to hold, you would expect east of the Rockies, the average price would be between $1.50 and $1.70. Maybe California is 15 cents above the rest of the country," he said. California, the highest-priced gasoline market in country, could even see gasoline below $2 a gallon in the near future.

But Kloza said gasoline prices should bottom in the next month and begin moving higher in February as refineries go into maintenance season for conversion to spring fuel.

"It's going to take some shock treatment on the part of oil producers to get their heads together and react — at what threshold the pain is severe enough to where they're finally going to react," said Kilduff.

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