Oil Falls to 3-Week Low as Investors Shrug Off U.S. Supply Dip

Oil, Gas Markets: Demand Destruction and Supplies
  • Crude inventories slipped 754,000 barrels last week: EIA
  • Imports along Gulf Coast dropped to lowest since 1991

Oil dropped to a three-week low in New York amid speculation that an unexpected decline in crude inventories is only temporary, with more gains to follow as production remains strong.

Crude supplies fell 754,000 barrels last week, compared with a 3.2 million barrel gain that had been projected by analysts in a Bloomberg survey. Stockpiles at Cushing, Oklahoma, the biggest U.S. oil-storage hub, climbed to a record, Energy Information Administration data show. Imports tumbled nationwide, especially on the Gulf Coast. Gasoline futures surged after the data showed that demand rose to the highest level this year.

"The surprise draw in crude stockpiles was a function of sharply lower imports," said Tim Evans, an energy analyst at Citi Futures Perspective in New York. "The imports could have been delayed and will rebound in the following week. In the larger picture this will probably turn out to be a one-off decline in imports, and we’ll get further seasonal gains in inventories."

Oil is down 25 percent this year on speculation a global glut will persist amid the outlook for higher exports from Iran after the removal of sanctions and surging U.S. crude supplies. BP Plc is “very bearish” for the first half of 2016 and expects excess output to start dropping only when storage tanks fill up, according to Chief Executive Officer Robert Dudley.

West Texas Intermediate for March delivery fell 49 cents, or 1.8 percent, to $27.45 a barrel on the New York Mercantile Exchange. It’s the lowest close since Jan. 20. Oil slumped 15 percent in five sessions. Total volume traded was 90 percent higher than the 100-day average at 2:52 p.m.

Growing Volatility

The CBOE Crude Oil Volatility Index, which measures expectations of price swings, rose to the highest since 2009 on Wednesday.

Brent for April settlement advanced 52 cents, or 1.7 percent, to $30.84 on the London-based ICE Futures Europe exchange. The European benchmark crude closed at a $1.18 premium to WTI for April delivery.

Rosneft OJSC CEO Igor Sechin said in London that the company will defend its market share and indicated he’s skeptical on the prospects of a deal between the Organization of Petroleum Exporting Countries and other producers to curb output.

“In the second half, every tank and swimming pool in the world is going to fill and fundamentals are going to kick in,” BP’s Dudley said at an industry conference in London Wednesday. “The market will start balancing in the second half of this year.”

Crude inventories rose to 502.7 million barrels in the week ended Jan. 29, the highest level since 1930, EIA data show.

Tumbling Imports

U.S. crude imports fell 14 percent to 7.12 million barrels a day, the biggest slide since December 2014. Imports along the Gulf Coast, known as PADD 3, tumbled 17 percent to 2.5 million barrels, the least since November 1991.

"The numbers are a little bit better than what people were expecting," said Craig Bethune, a fund manager at Manulife Asset Management Ltd. in Toronto who focuses on energy and natural resources investments. "These are baby steps. We have to see more before prices recover."

Crude stockpiles at Cushing, which is the delivery point for WTI, rose by 523,000 barrels to 64.7 million, the most in data going back to 2004.

"Cushing inventories rose to a new record high, which is influencing the front of the WTI curve," Evans said.  "This has added to the weakness of the March contract, which is trading at a $2 discount to April."

The spread between monthly oil-futures contracts are often seen as a reliable gauge of market conditions, and a discount on the earliest months -- known as contango -- typically signals that supplies exceed demand.

Gasoline Demand

Gasoline supplies climbed 1.26 million barrels to 255.7 million, the highest in weekly record going back to 1990. It was the smallest gain this year. Demand for the fuel rose 9.4 percent to 9.12 million.

March gasoline futures rose 4.9 percent to 94.25 cents a gallon after finishing Tuesday at $89.89, the lowest close since December 2008.

"The gasoline move is purely demand driven," said Thomas Finlon, director of Energy Analytics Group LLC in Jupiter, Florida. "They were beating the daylights out of the relative value of gasoline. Demand is better than people thought."

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