Oil Falls for First Time in Four Days After Supply Gain

Oil dropped for the first time in four days after the U.S. Energy Department said inventories climbed the most in 20 months and as Western nations considered releasing crude from strategic reserves.

Futures fell 1.8 percent as the government said supplies rose 7.1 million barrels to 353.4 million last week, the largest increase since July 2010. French Industry Minister Eric Besson said the U.S. proposed releasing oil from strategic reserves. A White House official said no decision has been made.

“It’s clear that the market is adequately supplied,” said Frank Verrastro, director of the energy and national security program at the Center for Strategic and International Studies in Washington. “The chatter about a reserve release appears to be an attempt to talk down the market.”

Crude oil for May delivery declined $1.92 to $105.41 a barrel on the New York Mercantile Exchange, the lowest settlement since March 22. Prices are up 6.7 percent this year.

Brent oil for May settlement dropped $1.38, or 1.1 percent, to end the session at $124.16 a barrel on the London-based ICE Futures Europe exchange. The European benchmark contract’s premium to West Texas Intermediate crude traded in New York increased to $18.75 from $18.21 yesterday. Brent is up 16 percent in 2012.

Strategic Reserve

U.S. officials said a release from the Strategic Petroleum Reserve was possible as crude stockpiles neared a 10-year seasonal high. The weekly increase was more than twice the gain of 2.55 million that was the median of 12 analyst responses in a Bloomberg News survey.

“The balance is trending to a surplus, a pretty significant surplus,” said Sarah Emerson, managing director of Energy Security Analysis Inc. in Wakefield, Massachusetts.

The French government welcomed a U.S. proposal to release fuel, Besson said today in Paris after a cabinet meeting. France is waiting for an International Energy Agency report on supplies before making a decision, Valerie Pecresse, France’s budget minister, said at a later press conference.

The Obama administration hasn’t decided whether to release oil or made a proposal to allies, Josh Earnest, deputy White House press secretary, said in Washington. Charles McConnell, acting assistant secretary for fossil energy, said yesterday that the U.S. may use the reserve.

The IEA, the energy adviser to 28 countries, coordinated the release of reserves last year after shipments from Libya were disrupted.

‘Huge Build’

“It’s mostly the talk of the SPR that’s really had most of the effect on the selloff and then there’s the huge build in inventories that’s exacerbated it,” said Fred Rigolini, vice president of Paramount Options Inc. in New York.

Stockpiles rose as oil imports surged 13 percent to 9.27 million barrels a day in the seven days ended March 23, the Energy Department report showed. Shipments have arrived at an average rate of 8.9 million barrels a day over the past year.

“This was a huge build, bigger than anyone expected,” said Todd Horwitz, chief strategist at Adam Mesh Trading Group in New York. “It looks like the crude price has seen its top for quite a while.”

Gasoline inventories declined 3.54 million barrels to 223.4 million last week, the department said. Supplies of distillate fuel, a category that includes heating oil and diesel, fell 711,000 barrels to 135.9 million.

Refinery Capacity

Refineries (DOEPPERC) operated at 84.5 percent of capacity, up from 82.2 percent the prior week, the report showed. The gain came as refining capacity dropped. Capacity on the East Coast, known as Padd 1 (DOEPOPP1), plunged 27 percent to 1.19 million barrels a day, the report showed.

“When U.S. inventories are climbing more than 7 million barrels, it doesn’t sound like we’re burning through a lot of crude here,” said Addison Armstrong, director of market research at Tradition Energy in Stamford, Connecticut.

Futures have gained this year because of concern that Western sanctions aimed at halting Iran’s nuclear program will disrupt Middle East supplies. Iran has threatened to shut the Strait of Hormuz, a transit route for a fifth of the world’s oil, in response to an embargo on its exports.

“The fundamentals aren’t tight,” Emerson said. “I can see prices trending below $100 without a resolution of the Iran situation. We would easily be back in the $80s if the Iran issue were resolved.”

Iran Talks

Iran will meet with representatives from the U.S. and five other countries for talks concerning its nuclear program on April 14 in Istanbul, the first such negotiations in almost 15 months, the Wall Street Journal reported, citing a senior European Union diplomat it didn’t name.

“We have a very specific rumor of talks between Iran and Western states,” said Tim Evans, an energy analyst at Citi Futures Perspective in New York. “The geopolitical risk premium in the oil is being reduced as a result.”

Electronic trading volume on the Nymex was 511,070 contracts as of 3:07 p.m. in New York. Volume totaled 403,832 contracts yesterday, 36 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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