Oil Declines After U.S. Stockpiles Surge the Most Since 2

April 4 (Bloomberg) -- Oil tumbled after the Energy Department said U.S. stockpiles surged the most since 2008 as domestic crude output climbed to the highest level in 12 years.

Futures fell to a seven-week low as inventories rose 9.01 million barrels to 362.4 million last week, the most since June. Production gained 2.9 percent to 6.05 million barrels a day. Oil also decreased after the Federal Reserve signaled it may refrain from more monetary stimulus.

“U.S. inventories are obviously more than ample,” said Bill O’Grady, chief market strategist at Confluence Investment Management in St. Louis, which oversees $1.3 billion. “U.S. production keeps increasing. This proves that when prices rise high enough, producers are going to find new ways to bring supply to market.”

Crude oil for May delivery dropped $2.54, or 2.4 percent, to $101.47 a barrel on the New York Mercantile Exchange, the lowest settlement since Feb. 14. Prices have increased 2.7 percent this year.

Brent oil for May settlement fell $2.52, or 2 percent, to end the session at $122.34 a barrel on the London-based ICE Futures Europe exchange. The European benchmark contract settled at a $20.87 premium to West Texas Intermediate, the grade traded in New York, the widest spread since October.

U.S. crude output last week was at the highest level since December 1999. Domestic production averaged over four weeks rose 5.2 percent from a year earlier, the department said.

Surging Output

The surge in U.S. oil production reflects a change in the way the department estimates output, said Barbara Mariner-Volpe, who is in charge of the oil and gas supply statistics. The weekly estimates rely on monthly production tallies that the department calculates using state reports and Interior Department data, she said.

In the past, the Energy Department revised its monthly figures once a year based on updated state and federal numbers, she said. In April, the department began incorporating that information on a monthly basis.

Crude imports climbed 5.4 percent to 9.77 million barrels a day last week, the highest level since the period ended Jan. 6. Fuel imports surged 15 percent to 2.04 million barrels a day, the most in two months.

Supplies of crude oil were projected to rise 2.5 million barrels, according to the median estimate of 11 analysts surveyed by Bloomberg.

Test $100

“We’re going to probably test $100 in the next week and go lower,” said Todd Horwitz, chief strategist at Adam Mesh Trading Group in New York.

Stockpiles at Cushing, Oklahoma, the delivery point for New York futures, rose 729,000 barrels to 40.3 million, the highest level since May, the report showed.

“Rising production here is the reason WTI is trading at such a big discount to Brent,” O’Grady said.

Oil also fell after the Federal Reserve signaled it may refrain from further monetary accommodation unless the economy falters or prices rise at a rate slower than its 2 percent target, according to the minutes of its March 13 policy meeting released yesterday.

The central bank affirmed its plan, first announced in January, to hold interest rates near zero through late 2014 as the economy’s improvement may not be sufficient to lower the outlook for coming years. There had been speculation the Fed would proceed with a third round of bond purchases in a tactic that has been dubbed quantitative easing. The Fed bought a total of $2.3 trillion in bonds from December 2008 to June 2011.

Quantitative Easing

“The release of the Fed minutes have confirmed to the market that there won’t be any QE3,” said Marshall Berol, co-portfolio manager of the Encompass Fund in San Francisco, which manages about $300 million of assets. “The inventory numbers add to the negative sentiment.”

Markets also moved lower after Spain sold fewer bonds than its maximum target, bolstering concern that the European debt crisis will spread. Spain sold 2.59 billion euros ($3.4 billion) of bonds today, just above the minimum amount it planned for the auction and below the 3.5 billion-euro maximum target.

“We were down before the inventory report because of the Fed minutes” and the bond auction in Spain, said Chip Hodge, who oversees a $9 billion natural-resource bond portfolio as senior managing director at Manulife Asset Management in Boston. “Absent a supply shock, supplies should be fine.”

Equity Decline

The Standard & Poor’s 500 Index was down 0.9 percent at 3:14 p.m. The dollar strengthened 0.7 percent versus the euro. A stronger U.S. currency reduces the appeal of raw materials as an investment. The Standard & Poor’s GSCI Index of 24 commodities dropped 1.8 percent, led by silver and cotton.

“There’s no reason to have any view of the markets other than risk off,” Berol said.

Electronic trading volume on the Nymex was 591,428 contracts as of 4:08 p.m. in New York. Volume totaled 542,362 contracts yesterday, 17 percent below the three-month average. Open interest was 1.57 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