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Heating Oil Futures Slide as Saudi Production Pressures Brent

Sept. 19 (Bloomberg) -- Heating oil futures slid to a one-month low as Brent crude, a benchmark for more than half of the world’s oil, weakened on speculation that Saudi Arabia is increasing supply.

Futures slid 2.7 percent as Brent dropped, which could reduce the price of imported crude used to manufacture products. Saudi Arabia is pumping about 10 million barrels a day of crude and will produce more if customers demand it, a Persian Gulf official with knowledge of the matter said yesterday. Gasoil dropped 3.1 percent in London, reducing the incentive to ship diesel fuel from the U.S. to Europe.

“Heating oil has gone down as Brent is under pressure as the Saudis feel the current price is too high and they have been increasing production,” said Andy Lipow, president of Lipow Oil Associates LLC in Houston.

Heating oil for October delivery fell 8.31 cents to settle t $3.044 a gallon on the New York Mercantile Exchange, and have lost 6 percent in three days. Futures traded below the 40-day moving average for the first time since July 9.

Brent for November settlement declined $3.84, or 3.4 percent, to $108.19 a barrel on the ICE Futures Europe exchange. Gasoil for October delivery fell $30.25 to $958.25 a ton.

“The pledge by the Saudis to keep pumping oil has been overhanging the market,” said Phil Flynn, vice president of research at PFGBest in Chicago.

The ideal crude price for OPEC is $100 a barrel and current prices are not supported by the fundamentals, the Persian Gulf official said, declining to be identified because he’s not authorized to speak publicly.

Well-Supplied

The global oil market is well supplied, OPEC’s spare production capacity is at “comfortable levels” and commercial oil inventories “remain healthy,” OPEC Secretary-General Abdalla Salem El-Badri said today.

“There is no shortage of oil anywhere in the world. And this is expected to continue,” El-Badri said today in a speech at the European Mineral Resources Conference in Leoben, Austria, according to a transcript on OPEC’s website.

Heating oil jumped 26 percent from June 21 to Aug. 31 on speculation that the Federal Reserve would enact further economic stimulus to boost growth and reduce unemployment. Money managers increased bullish positions on futures and options to the highest level in almost four months in the seven days ended Sept. 4, Commodities Futures Trading Commission data show.

“We’ve seen these markets add a lot of speculative length the last few weeks on the hopes for economic stimulus,” said Andrew Lebow, a senior vice president at Jefferies Bache LLC in New York. “Now if the Saudis and others increase production in a market where demand is not robust, you have to worry about further inventory build.”

Distillate Inventories

The Energy Department reported today that inventories of distillates, which include heating oil and diesel, fell 322,000 barrels to 128.2 million, the first decline in six weeks. Demand for distillates rose 13 percent to 3.69 million barrels, the highest level since Aug. 3. Demand over four weeks was 11 percent lower than a year earlier.

Crude oil inventories jumped 8.53 million barrels, or 2.4 percent, to 367.6 million, the biggest increase since March 30. Refinery utilization gained 4.2 percentage points to 88.9 percent as plants along the Gulf Coast started units after Hurricane Issac.

“Even though you do have an inventory draw, you do have this crude build and refineries are coming back online,” said Sander Cohan, a global transportation fuels analyst and principal with Energy Security Analysis Inc. in Wakefield, Massachusetts.

October-delivery gasoline fell 7.04 cents, or 2.4 percent, to $2.8286 a gallon, the lowest settlement since July 26. Prices have fallen 6.2 percent this week.

Bullish Positions

Money managers as of Sept. 11 held the largest net-long position in gasoline futures and options since May 1, CFTC data show.

“You had a market already heavy on speculative length,” said Tim Evans, an energy analyst at Citi Futures Perspective in New York. “They either ran out of ammunition or they lost their nerve and are cashing out of a market that is not physically tight. And the products are going nowhere independent of oil.”

Gasoline inventories fell 1.41 million barrels to 196.3 million, the eighth consecutive decline and the lowest level since October 2008. Demand dropped 0.7 percent to 8.63 million barrels a day, the lowest level in nine weeks, and over four weeks was 0.9 percent below a year earlier.

Regular gasoline at the pump slipped 0.5 cent to $3.854 a gallon yesterday, AAA data showed. Prices reached a 2012 high of $3.936 on April 4.

To contact the reporter on this story: Barbara J Powell in Dallas at bpowell4@bloomberg.net

To contact the editor responsible for this story: Dan Stets at dstets@bloomberg.net

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