Oil Rises to Two-Year High After U.S. Inventories Drop More Than Forecast

Crude oil rose to the highest level in more than two years after government reports showed that U.S. supplies dropped and the country’s economy grew more than previously estimated in the third quarter.

Stockpiles fell 5.33 million barrels to 340.7 million last week, the Energy Department said. A 3.4 million-barrel decline was forecast, according to the median of 14 responses in a Bloomberg News survey. The Commerce Department said gross domestic product expanded 2.6 percent in the third quarter, up from a previous estimate of 2.5 percent.

“Today’s crude numbers were very bullish,” said Andre Julian, chief financial officer and senior market strategist at OpVest Wealth Management in Irvine, California. “The GDP numbers point to extended growth in the U.S. Previously, we were seeing economic and demand growth in China and emerging markets, now it’s spreading here.”

Crude oil for February delivery rose 66 cents, or 0.7 percent, to $90.48 a barrel on the New York Mercantile Exchange, the highest settlement since Oct. 3, 2008. Prices have climbed 14 percent this year.

Brent crude oil for February settlement advanced 45 cents, or 0.5 percent, to $93.65 a barrel on the London-based ICE Futures Europe exchange. It was the highest settlement price since Oct. 1, 2008.

Supplies in the week ended Dec. 17 were 6.8 percent greater than the five-year average for the period, the department said.

Gulf Coast

Stockpiles along the Gulf Coast, which holds almost half of U.S. refinery capacity, dropped 6.08 million barrels to 167.3 million. Some localities in the region levy taxes based on the amount in storage at year’s end.

“The draw is not that meaningful,” said Hamza Khan, an analyst with Schork Group Inc., a consulting company in Villanova, Pennsylvania. “The drop was largely limited to the Gulf Coast while supplies gained at Cushing. This is why the reaction was muted.”

Inventories at Cushing, Oklahoma, the delivery point for New York futures, increased 479,000 barrels to 36.4 million, the highest level since August.

Stockpiles of distillate fuel, a category that includes heating oil and diesel, dropped 589,000 barrels to 160.7 million, the first decline in three weeks. Analysts were split over whether supplies would rise or fall. Stockpiles on the East Coast declined 1.17 million barrels to 66.3 million.

“The big drop along the East Coast was to be expected because of the cold weather,” Khan said.

Low Temperatures

Cold air has gripped the New York region since Dec. 14, when a high temperature in the mid-20s Fahrenheit (about minus 4 Celsius) was 20 degrees lower than normal. Weekend highs are expected to be in the mid-30s.

Demand for distillate fuel climbed 7.4 percent to 4.05 million barrels a day, the highest level since Nov. 5.

Heating oil for January delivery climbed 1.21 cents, or 0.5 percent, to $2.5285 a gallon in New York, the highest settlement since Oct. 3, 2008.

“We’re seeing another dramatic drop in U.S. oil storage,” said Sean Brodrick, a natural resource analyst with Weiss Research in Jupiter, Florida. “We’re seeing an increase in economic activity, which will lead to further declines and higher prices.”

Today’s Commerce Department report showed consumer spending rose at a 2.4 percent pace last quarter, the fastest since the first three months of 2007, while less than the 2.8 percent estimated last month. Spending added 1.67 percentage points to GDP from July through September.

Household spending figures for November, due tomorrow, may show a 0.5 percent gain following a 0.4 percent increase in October, according to the Bloomberg survey median.

Grinding Higher

“We’re seeing oil grind higher along with the stock market on increasing optimism about the economy,” said Bill O’Grady, chief market strategist at Confluence Investment Management in St. Louis.

The Standard & Poor’s 500 Index yesterday completed its recovery from the six-month plunge that followed Lehman Brothers Holdings Inc.’s collapse in September 2008, extending its rally from a bear-market low in March 2009 to 85 percent.

The S&P 500 Index gained 0.3 percent to 1,257.77 at 3:22 p.m. in New York and the Dow Jones Industrial Average climbed 0.2 percent to 11,554.31.

China raised gasoline and diesel prices today by less than half of what crude oil has gained in the past month. The price of gasoline will climb by as much as 4 percent to 310 yuan ($47) a metric ton and diesel by 300 yuan a ton, the National Development and Reform Commission said yesterday, the third increase this year in the second-largest oil consuming country.

‘Over the Edge’

“The inventory numbers pushed us over the edge today,” said Phil Flynn, a Chicago-based analyst and trader at PFGBest, an investment adviser. “If it were some other day, more attention would have been paid to the Chinese news, which should slow demand.”

Oil volume on the Nymex was 344,353 contracts as of 3:23 p.m. in electronic trading in New York. Volume totaled 357,619 contracts yesterday, 47 percent below the average of the past three months and the lowest level since Nov. 26, the day after Thanksgiving. Open interest was 1.37 million contracts.

“With this light holiday volume anything can happen,” Flynn said.

To contact the reporter on this story: Mark Shenk in New York at mshenk1@bloomberg.net

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

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