Crude Oil Advances to Seven-Week High as Fuel Supplies Drop Unexpectedly

Crude oil rose to a seven-week high after a U.S. government report showed unexpected declines in supplies of gasoline and distillate fuel as refiners cut operating rates to the lowest level since April.

Oil gained 2.2 percent as total petroleum supplies fell the most since March and gasoline demand increased by the largest amount since February. A Chinese purchasing managers’ index showed manufacturing accelerated for a second month in the world’s fastest-growing oil-consuming country.

“Not only are things looking better in the U.S., but we’re also seeing emerging markets such as China continue to heat up,” said Sean Brodrick, a natural resource analyst with Weiss Research in Jupiter, Florida. “This is a bullish force in the market.”

Crude for November delivery rose $1.68 to settle at $77.86 a barrel on the New York Mercantile Exchange, the highest closing price since Aug. 11. The price ranged from $75.60 to $78.13.

Futures have climbed 8.3 percent this month and 2.9 percent in the third quarter. Nymex futures lost 9.7 percent in the second quarter, the first decline in six quarters. Prices have gained 17 percent in the past year.

Brent oil for November delivery gained $2.06, or 2.6 percent, to settle at $80.77 a barrel, the highest level since Aug. 9.

Gasoline Inventories Fall

Gasoline inventories fell 3.47 million barrels to 222.6 million in the week ended Sept. 24, the Energy Department report showed. They were forecast to rise 350,000 barrels, according to the median of 14 analyst estimates in a Bloomberg News survey.

Distillates, including heating oil and diesel, declined 1.27 million barrels to 173.6 million, compared with a forecast increase of 325,000 barrels.

Oil and gasoline supplies were each 13 percent above the five-year average and distillate was 22 percent above the mean, according to the Energy Department.

“The headline numbers were a bit supportive and turned the market around,” said Kyle Cooper, director of research for IAF Advisors in Houston. “When you look at the overall inventory numbers, they’re still pretty robust across the board. It’s going to take something more significant to break us out of the current trading range.”

Total petroleum supplies fell 5.11 million barrels from a record the week ended Sept. 17. The 0.5 percent drop to 1.14 billion was the biggest since the week ended March 5.

Refinery Capacity Drops

The Energy Department said refineries ran at 85.8 percent of capacity last week, down from 87.8 percent the prior week. They were forecast to decline by 0.6 percentage point. Refiners typically take units down for maintenance in the fall and spring, before the peak fuel-demand seasons.

“The refinery maintenance season is doing what it’s supposed to do,” said Edward Morse, head of commodities research at Credit Suisse Group AG in New York, citing the reduction in refined-fuel supply.

Oil inventories fell 475,000 barrels to 357.9 million, the report showed. Supplies were forecast to drop 700,000 barrels. Yesterday, the industry-funded American Petroleum Institute said U.S. crude stockpiles decreased by 2.42 million barrels last week to 361.7 million, the first reduction in three weeks.

“Oil is proving resilient,” said Alexander Ridgers, head of commodities at London-based CMC Markets, which handles more than $150 million a day in U.S. crude contracts. “There are some good solid data coming out. Better figures suggest that the global economy is improving.”

China Manufacturing

An index of China’s manufacturing released today by HSBC Holdings Plc and Markit Economics rose to 52.9, the highest level in five months. The data are seasonally adjusted and readings above 50 indicate an expansion. China overtook the U.S. as the world’s largest energy user last year.

China’s imports of oil from Saudi Arabia, the world’s largest crude exporter, will increase 19 percent from last year to 50 million metric tons in 2010, the official Saudi Press Agency reported today, citing Yang Honglin, China’s ambassador to Saudi Arabia. China overtook the U.S. as Saudi Arabia’s largest buyer of oil this year.

Oil also rose as the dollar fell to an eight-month low against a basket of currencies. A weaker dollar bolsters the appeal of commodities as an alternative investment.

“As everything breaks down on the dollar front, it may be the impetus we need to get us over $80 a barrel,” said John Kilduff, a partner at Again Capital LLC, a New York-based hedge fund that focuses on energy.

The Dollar Index, which tracks the currency against six major peers, fell 0.3 percent to the lowest level since January. The dollar has lost 1.3 percent against the euro since Sept. 27. It was down 0.3 percent at $1.3627 per euro.

Oil volume in electronic trading on the Nymex was 729,412 contracts as of 3:23 p.m. in New York. Volume totaled 636,937 contracts yesterday, 0.9 percent below the three-month average. Open interest was 1.33 million contracts.

To contact the reporter on this story: Margot Habiby in Dallas at mhabiby@bloomberg.net.

To contact the editor responsible for this story: Dan Stets at dstets@bloomberg.net.

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