Crude Oil Falls on Surprise US Supply Increase

Energy futures fell Thursday after the government reported unexpected increases in crude oil and gasoline inventories last week and OPEC forecast fourth-quarter demand for oil would be less than expected.

Oil Pipeline in Germany
Oil Pipeline in Germany

At the pump, meanwhile, gas prices inched 0.1 cent higher overnight, pulling further above $3 to a national average of $3.112 a gallon, according to AAA and the Oil Price Information Service. Prices are likely to rise another 10 to 15 cents in coming weeks to catch up with oil prices, which rose 42 percent from August to a record $98.62 a barrel last week. Gas prices peaked at a record $3.227 a gallon in May.

In its weekly inventory report, the Energy Department's Energy Information Administration said oil inventories rose by 2.8 million barrels during the week ended Nov. 9. Analysts surveyed by Dow Jones Newswires, on average, had expected a decline of 300,000 barrels.

That helped send light, sweet crude for December delivery falling 66 cents to settle at $93.43 a barrel on the New York Mercantile Exchange after trading off more than $2 a barrel earlier. Crude prices have been volatile this week, falling more than $3 on Tuesday and rising more than $2 on Wednesday after hitting a record of $98.62 one week ago.

London Brent crude was also lower.

The drop in crude was limited, however, by an unexpectedly large drop in heating oil supplies, a mixed report on Iran's compliance with U.N. demands over its nuclear program and an attack on an oil pipeline in Nigeria.

But the market's feeling was that "there's plenty of crude oil out there in the world," said Tim Evans, an analyst at Citigroup, in New York. "We just have to buy it and have it delivered."

The Organization of Petroleum Exporting Countries forecast that demand for oil in the fourth quarter would rise 1.97 percent, down from expectations of a 2.1 percent increase a month ago. The revision was due in part to the effect high prices are having on demand.

"Late winter in North America along with the high price of transport fuels appears to be reducing regional oil consumption in the fourth quarter, leading to a downward revision of (100,000) barrels a day for that quarter," the group said in its monthly oil market report.

OPEC's revision follows a revised forecast from the International Energy Agency, which earlier this week said demand for oil is slowing and supplies are rising.

The revised forecasts and Thursday's inventory report appeared to reverse some of the concerns about tight supplies and rising demand that have driven prices higher in recent weeks. One week ago, oil prices seemed destined to rise to $100 a barrel, then fell when last week's EIA report showed a smaller than expected decline in supplies.

Mixed Signals from OPEC

Late in the day, the official Saudi Press Agency quoted OPEC Secretary General Abdalla Salem el-Badri as saying OPEC was ready to increase oil production "if that will contribute to lower the (crude) price." Mixed statements from OPEC officials have contributed to price volatility in recent days. El-Badri also blamed speculators for high prices.

Oil prices could quickly reverse course and again approach $100 a barrel if a future inventory report shows an unexpected decline in supplies, if new conflict develops in the Middle East or another oil producing region or if there's a late season hurricane or prolonged cold snap in the U.S. Indeed, Thursday's crude drop was limited by an International Atomic Energy Agency report that said Iran, while telling U.N. investigators the truth about its nuclear program, continues to ignore Security Council demands that it halt uranium enrichment.

Prices also drew some support from news that a major pipeline feeding one of Royal Dutch Shell's two main oil export terminals in southern Nigeria was attacked and ruptured. Analysts said oil production would be reduced by 50,000 barrels a day.

November heating oil fell 1.47 cents to settle at $2.5587 a gallon on the Nymex. Heating oil futures, down nearly 4 cents earlier in the session, gained ground late in the day on last week's inventory decline, analysts said.

December natural gas fell 13.5 cents to settle at $7.70 per 1,000 cubic feet on the Nymex after the EIA, in a separate report, said natural gas inventories fell by 9 billion cubic feet last week, in line with analyst expectations.

The EIA report, delayed by one day this week due to Monday's Veterans Day holiday, also said oil inventories at the closely-watched Nymex delivery terminal in Cushing, Okla., were unchanged at 13.4 million barrels.

Gasoline supplies rose by 700,000 barrels, the EIA said. Analysts had expected a 100,000-barrel decline. But inventories of distillates, which include heating oil and diesel fuel, fell by 2 million barrels, much more than the 300,000 barrel decline analysts had expected.

Refinery activity rose by 1.5 percentage points last week to 87.7 percent of capacity. Analysts had expected refinery utilization to rise by 0.7 percentage point.

Crude imports rose last week by an average of 831,000 barrels a day to 10.5 million barrels a day. Gasoline imports fell last week by 117,000 barrels a day to an average of 1 million barrels a day.

Gasoline demand fell last week by 180,000 barrels, but is up by 0.6 percent over the last four weeks compared to the same period last year, the EIA said.