Oil Climbs After U.S. Inventories Unexpectedly Decline in

Oil rose after the U.S. Energy Department said that crude inventories unexpectedly dropped 1.16 million barrels last week.

Futures climbed 1.1 percent as the report showed supplies fell for the first time in five weeks and imports decreased. Stockpiles were forecast to gain 2.2 million barrels, according to analysts surveyed by Bloomberg News. Crude declined 2.3 percent yesterday after Saudi Arabian Oil Minister Ali al-Naimi said the kingdom can boost output by 25 percent.

“The report was a little bullish because we were looking for a big build and it didn’t happen,” said Phil Flynn, vice president of research at PFGBest in Chicago. “The market overreacted to the Saudi Arabian pledge yesterday.”

Crude oil for May delivery increased $1.20 to settle at $107.27 a barrel on the New York Mercantile Exchange. Prices have risen 8.5 percent this year.

Brent oil for May settlement rose 8 cents to $124.20 a barrel on the London-based ICE Futures Europe exchange.

Oil imports decreased 5.6 percent to 8.22 million barrels a day in the seven days ended March 16, the report showed. Shipments have arrived at an average rate of 8.9 million barrels a day over the past year.

Sixty-seven ships awaited passage through the Houston and Galveston/Texas City ship channels on March 13 after pilots resumed transits that had been halted by fog, the U.S. Coast Guard said. The Houston Ship Channel links the largest U.S. petroleum port with the Gulf of Mexico.

Delayed Arrivals

“The fall in crude supplies didn’t have as much impact on the market as would normally be the case because it was probably due to weather-related delays,” said John Kilduff, a partner at Again Capital LLC, a New York-based hedge fund that focuses on energy. “Weather along the Gulf can wreak havoc with imports.”

Gasoline inventories declined 1.21 million barrels to 226.9 million last week, the department said. Stockpiles were forecast to slip 2 million barrels, according to the median of 11 analyst estimates in a Bloomberg News survey.

Consumption (DOEDMGAS) of the motor fuel fell 0.4 percent to 8.38 million barrels a day in in the seven days ended March 16, the report showed. Demand was down 7.7 percent from a year earlier.

“High prices are not a good thing for demand,” said Chip Hodge, who oversees a $9 billion natural-resource bond portfolio as senior managing director at Manulife Asset Management in Boston. “Stronger economic growth would make rising prices a bit more palatable to consumers.”

Retail Gasoline

The national average retail price of unleaded regular gasoline in the U.S. climbed to a 10-month high of $3.864 a gallon yesterday, according to a daily survey by AAA, the country’s largest motoring organization.

Supplies of distillate fuel, a category that includes heating oil and diesel, gained 1.76 million barrels to 136.6 million. Stockpiles were estimated to fall 1.5 million barrels.

Commercially held crude inventories in China, the second- largest oil consuming country, fell 3.8 percent in February, according to a newsletter published by the official Xinhua News agency. That’s about 28 million metric tons, Bloomberg calculations showed. Supplies were down for the fourth time in five months.

Saudi Arabia, OPEC’s biggest oil producer, has output capacity of 12.5 million barrels a day and will pump about 9.9 million this month and in April, al-Naimi said yesterday in Doha, Qatar. The global market is oversupplied by as much as 2 million barrels a day and inventories are rising, he said.

Saudi Specifics

“We already knew that the Saudis were increasing output,” said David McAlvany, chief executive officer of McAlvany Financial Group in Durango, Colorado. “What Ali al-Naimi did was give us more specifics. We now know the exact amount they are currently pumping and how much spare capacity they have.”

Oil in New York surged 8.7 percent last month on concern European Union and U.S. sanctions aimed at Iran’s nuclear program will disrupt oil shipments. The Persian Gulf nation has threatened to shut the Strait of Hormuz, a transit route for a fifth of the world’s oil supplies, in response to an embargo.

Secretary of State Hillary Clinton announced yesterday that an “initial group” of countries, comprising Japan and 10 European Union nations, have “significantly reduced” their Iranian oil purchases and thus qualified for an exemption from U.S. sanctions for a renewable period of 180 days under the law.

The U.S. didn’t grant waivers to China, the leading importer of Iranian crude in the first half of last year, or to India and South Korea, which were the third- and fourth-largest buyers, according to the Energy Department. Japan ranks second.

“Fears about the Middle East are what is keeping oil at these levels,” said Todd Horwitz, chief strategist at Adam Mesh Trading Group in New York. “We’re going stay in this $104 to $110 range until there’s a resolution of the Iran issue. Either there will be an explosion or we’ll come to some kind of agreement.”

Electronic trading volume on the Nymex was 415,627 contracts as of 2:31 p.m. in New York. Volume totaled 672,108 contracts yesterday, 6.5 percent below the three-month average. Open interest was 1.56 million.

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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