Oil Falls From 1-Month High as U.S. Crude Supplies, Output Climb

  • Nationwide crude inventories rise 3.07 million barrels: EIA
  • U.S. refineries operate at lowest rate since February

The Bearish Fundamentals Behind Oil's Recent Rise

Oil dropped from a one-month high after government report showed that U.S. crude inventories and production climbed.

Nationwide, stockpiles rose for a second week, according to the Energy Information Administration. Supplies at Cushing, Oklahoma, the delivery point for WTI contracts, increased for the first time in six weeks and production rebounded from a 10-month low. Refinery operations slowed to the lowest level in seven months.

Oil climbed as much as 2.4 percent in New York before the release of the EIA data at 10:30 a.m. in Washington on speculation supplies might drop. Prices had slumped to a six-year low in August as the global glut dragged on. U.S. crude stockpiles remain about 100 million barrels above the five-year average and OPEC continues to pump above its target.

"Today’s report was a complete disaster for those who bet on higher prices as it shows inventories and production are up," said Rob Haworth, a senior investment strategist in Seattle at U.S. Bank Wealth Management, which oversees $128 billion of assets. "It’s hard to argue for $50 oil with these fundamentals."

Crude Falls

West Texas Intermediate for November delivery fell 72 cents, or 1.5 percent, to close at $47.81 a barrel on the New York Mercantile Exchange. Futures climbed 4.9 percent to $48.53 Tuesday, the highest settlement since Aug. 31. The volume of all futures traded was 51 percent higher than the 100-day average at 2:40 p.m.

Brent for November settlement slipped 59 cents, or 1.1 percent, to end the session at $51.33 a barrel on the London-based ICE Futures Europe exchange. . The European benchmark crude closed at a $3.52 premium to WTI.

Nationwide crude stockpiles rose 3.07 million barrels to 461 million in the week ended Oct. 2, the EIA said. Supplies were forecast to have gained by 2.25 million barrels last week, according to a Bloomberg survey. Inventories at Cushing, which is the nation’s biggest oil-storage hub, increased 98,000 barrels to 53.1 million.

U.S. crude output increased 76,000 barrels a day to 9.17 million last week , according to EIA data. Production is still down 440,000 barrels a day from a four-decade high of 9.61 million reached in June. Falling crude prices have spurred America’s oil drillers to sideline more than half the country’s rigs in the last year.

Hot Money

Price gains have been driven by “hot money chasing headlines," Ed Morse, the head of global commodity research at Citigroup Inc. in New York, said in a television interview with Bloomberg Surveillance. Investors are mistakenly thinking that the falling U.S. rig count signals an immediate slide in output, he said.

The "underlying fundamentals are just fundamentally bearish,” Morse said.

Refineries reduced operating rates by 2.3 percentage points to 87.5 percent of capacity, the least since the week ended Feb. 27.

Falling Demand

U.S. refiners typically slow during September and October to perform maintenance after the end of the summer peak driving season. U.S. fuel consumption dropped 1.2 percent to an average 19.3 million barrels a day over the four weeks ended Oct. 2, the lowest since April, the report showed.

"Demand looks pretty weak," Michael Lynch, president of Strategic Energy & Economic Research in Winchester, Massachusetts, said by phone. "It’s going to be hard to sustain higher prices unless we get stronger demand or a significant drop in production."

The EIA increased its U.S. crude output forecast for this year and next as companies shift a greater share of their investment to currently producing fields.  The agency increased its 2015 forecast by 0.3 percent to 9.25 million barrels a day Tuesday in its monthly Short-Term Energy Outlook.

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