Oil Rises After U.S. Supplies Tumble Most in Seven Months

Oil climbed after U.S. crude inventories dropped the most in seven months and the Federal Reserve said it may take steps to boost the economy.

Futures advanced 1 percent after the U.S. Energy Department said stockpiles decreased 6.52 million barrels last week, the biggest decline since December. The Federal Reserve said it will closely monitor the economy and act “as needed” to spur the recovery. The European Central Bank may move to ease Europe’s debt crisis at a meeting tomorrow.

“The bigger-than-expected decline in stocks is obviously bullish,” said Tom Essaye, president of Kinsale Trading in Palm Beach, Florida. “The market is capped at about $90 a barrel at the moment. Prices will slowly gain as we whittle away at inventories.”

Crude oil for September delivery rose 85 cents to settle at $88.91 a barrel on the New York Mercantile Exchange. Prices are down 10 percent this year.

Brent oil for September settlement increased $1.04, or 1 percent, to end the session at $105.96 a barrel on the London-based ICE Futures Europe exchange. The European benchmark grade traded at a $17.05 premium to West Texas Intermediate crude traded in New York. It was the widest spread since May 16.

The supply decline left U.S. crude inventories at 373.6 million barrels, 5.2 percent higher than a year earlier, according to the report. Stockpiles were forecast to fall 1 million barrels, according to the median of 12 responses in a Bloomberg survey.

Crude imports slipped 1.23 million barrels a day to 8.41 million, the lowest level since the week ended March 16.

Oil stockpiles at Cushing, Oklahoma, the delivery point for WTI fell 1.39 million barrels to 45.1 million, the biggest decrease since May 2011.

‘Some Clarity’

“Inventories are still pretty high,” said Chip Hodge, who oversees a $9 billion natural-resource bond portfolio as senior managing director at Manulife Asset Management in Boston. “Until we get some clarity about the economy and the situation in Europe, oil is going to trade in the high $80s to low $90s.”

Chairman Ben S. Bernanke held off on stepping up record stimulus even as consumer spending flagged, economic growth slowed and unemployment persisted at 8.2 percent. Before their next meeting starts Sept. 12, Bernanke and his colleagues will assess reports on unemployment in July and August.

“The U.S. government will do everything they can to keep the ball rolling, so I think we’ll see more and more stimulus come into the market,” Gerrit Zambo, an oil trader at Bayerische Landesbank in Munich, said before the Fed announcement. “I don’t see much upside for oil from a fundamental point of view, but if equity markets go up due to more stimulus, oil will follow.”

Chinese Growth

Leaders of China’s ruling Communist Party pledged yesterday to ensure stable growth and ECB President Mario Draghi vowed last week to do whatever it takes to preserve the euro.

Europe’s debt crisis has reduced economic growth and the continent’s energy demand over the past two years. The crisis that began in Greece has spread to Ireland, Portugal, Italy, Spain and Cyprus.

“The European debt has reduced economic activity in the region, which has reduced demand for U.S. and Chinese exports,” Hodge said. “This weakness has caused demand to slow in the U.S. and China. This has become a vicious cycle.”

Companies in the U.S. added more workers than projected in July, a private report showed. The 163,000 increase in employment followed a revised 172,000 gain the prior month, Roseland, New Jersey-based ADP Employer Services said today. The median estimate of 38 economists surveyed by Bloomberg called for an advance of 120,000.

U.S. Manufacturing

The Institute for Supply Management’s factory index for the U.S. rose to 49.8 in July from 49.7 a month earlier, the Tempe, Arizona-based group said.

“The fundamentals don’t support prices going much higher,” said Marshall Berol, co-portfolio manager of the Encompass Fund in San Francisco, which has about $300 million in assets. “The U.S. economy has very modest growth and Europe is slowing. We need to see increasing growth for prices to rally.”

The U.S. was the biggest crude-consuming country last year, responsible for 21 percent of demand, according to BP Plc’s Statistical Review of World Energy released in June. The 27 members of the European Union accounted for 16 percent of global oil demand in 2011, BP said.

Fuel prices also gained after the government report showed that supplies of gasoline and distillate fuel, a category that includes heating oil and diesel, declined. Gasoline inventories fell 2.17 million barrels to 207.9 million last week. Stockpiles of distillate fuel slipped 974,000 barrels to 124.3 million.

Gasoline Rally

Gasoline for September delivery advanced 5.99 cents, or 2.2 percent, to settle at $2.8342 a gallon in New York. Heating oil for September delivery increased 1.08 cents, or 0.4 percent, to $2.8588 a gallon.

Electronic trading volume on the Nymex was 507,804 contracts as of 4:05 p.m. in New York. Volume totaled 521,322 contracts yesterday, 6.6 percent below the three-month average. Open interest was 1.4 million.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE