Oil Drops First Time in 6 Days on Unexpected Supply Gain

Oil in New York declined for the first time in six days after an Energy Department report showed an unexpected increase in U.S. crude inventories.

Futures dropped after stockpiles rose 1.99 million barrels last week. Supplies were forecast to fall 2.9 million barrels in a Bloomberg survey of analysts. Futures climbed earlier as Germany’s top court cleared the way for ratification of the European Stability Mechanism.

“There’s way too much oil available to support prices at this level,” said Todd Horwitz, chief strategist at Adam Mesh Trading Group in Chicago. “We’ve put in $98 as a solid top.”

Crude oil for October delivery declined 16 cents to settle at $97.01 a barrel on the New York Mercantile Exchange. The contract touched $98.06, the highest level since Aug. 23, before the release of the department’s report at 10:30 a.m. in Washington. Prices are down 1.8 percent this year.

Brent oil for October settlement rose 56 cents, or 0.5 percent, to end the session at $115.96 a barrel on the London-based ICE Futures Europe exchange. It was the highest close since Aug. 16.

The European benchmark grade was at an $18.95 premium to New York-traded West Texas Intermediate oil, the most since Aug. 16 and up from $18.23 yesterday.

Crude production rose 0.7 percent to 5.53 million barrels a day in the seven days ended Sept. 7, the report showed. That’s up from the previous week when Hurricane Isaac sent output plunging 12 percent to 5.49 million barrels a day, the lowest level since September 2011.

Refinery Operations

Refineries operated at 84.7 percent of capacity, down 1.4 percentage points from the prior week and the lowest level since April, the report showed.

Total fuel use decreased 2.6 percent to an average 18.7 million barrels a day in the four weeks ended Sept. 7, the biggest decline since September 2008. Gasoline consumption fell 1.7 percent to 9 million barrels a day during the same period.

“The unexpected drop in refinery runs and some really poor demand numbers explain the inventory numbers,” said Tim Evans, an energy analyst at Citi Futures Perspective in New York. “I didn’t expect to see a further drop in refinery utilization rates. The previous report didn’t fully reflect the impact of Hurricane Isaac on refineries.”

Gasoline inventories fell 1.18 million barrels to 197.7 million last week, the lowest level since October 2008, the report showed. Stockpiles were projected to drop 1.7 million barrels, according to the median of 11 analyst estimates in the Bloomberg survey.

Supplies of distillate fuel, a category that includes heating oil and diesel, increased 1.48 million barrels to 128.6 million, the highest level since April. Stockpiles were projected to decline 500,000 barrels.

Court Ruling

Germany’s Federal Constitutional Court in Karlsruhe dismissed motions filed by groups that sought to block the European Stability Mechanism while ruling Germany’s 190 billion-euro ($245 billion) contribution can’t be increased without legislative approval. The court said Germany can ratify the fund if it includes binding caveats saying it won’t be forced to assume higher liabilities without its consent.

Last week, European Central Bank President Mario Draghi said the ECB was ready to buy unlimited quantities of short-dated government bonds of nations signed up to rescues.

“The German court ruling is key,” said Mike Wittner, head of oil market research at Societe Generale SA in New York. “The market reaction to the decision was muted because a lot of good news on Europe has been priced in, especially after Draghi’s decision last week.”

Stimulus Watch

Traders are watching to see if the U.S. and China will announce further stimulus measures. The Federal Open Market Committee started a two-day meeting today which may culminate in additional efforts to boost the economy. The Fed bought a total of $2.3 trillion in bonds from December 2008 to June 2011 in two rounds of asset purchases known as quantitative easing.

“There’s some uncertainty about what will come out of the FOMC meeting,” said Gene McGillian, an analyst and broker at Tradition Energy in Stamford, Connecticut. “Their announcement will be significant for the market. Expectations of further stimulus have been a huge prop for the market.”

Chinese Premier Wen Jiabao said at the World Economic Forum in Tianjin, China, yesterday that his government has more room for fiscal and monetary measures to support growth.

Ambassador Killed

U.S. ambassador to Libya Chris Stevens and three other Americans were killed in an attack on the consulate in Benghazi amid protests in the North African country and neighboring Egypt over a film about the Prophet Muhammad viewed as blasphemous by Muslims. Libya holds Africa’s largest crude reserves.

“Under normal circumstances something like what occurred in Libya would send prices higher, but there’s been no market reaction because of ample supplies,” Horwitz said.

Electronic trading volume on the Nymex was 444,985 contracts as of 3:11 p.m. Volume totaled 537,652 contracts yesterday, 0.9 percent above the three-month average. Open interest was 1.59 million, the highest level since May 8.

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