Oil Falls After Report Shows Larger-Than-Forecast Supply Gain

Feb. 4 (Bloomberg) -- Crude oil fell after a government report showed that U.S. inventories jumped more than twice the amount analysts forecast.

Supplies rose 7.2 million barrels to 346.1 million barrels last week, the highest since July 2007, according to the Energy Department. Inventories were forecast to climb by 3 million barrels, the median of 14 analyst estimates in a Bloomberg News survey. Prices rose earlier on signs OPEC is implementing a record production cut announced in December.

“We’ve got a tremendous surplus in oil supplies and it will only go higher,” said Sean Brodrick, natural resource analyst with Weiss Research in Jupiter, Florida. “Demand is falling faster than OPEC and other producers can cut back.”

Crude oil for March delivery declined 46 cents, or 1.1 percent, to settle at $40.32 a barrel at 2:48 p.m. on the New York Mercantile Exchange. Prices are down 9.6 percent this year and 55 percent from a year ago.

The increase last week left stockpiles 15 percent higher than the five-year average for the period, the department said.

The price of oil for delivery in April is $3.92 a barrel higher than for March. December futures are up $13.29 from the front month. This structure, in which the future month’s price is higher than the one before it, is known as contango, and is often an indicator of oversupply.

Contango

“The contango is fascinating,” said Christopher Edmonds, the managing principal of FIG Partners Energy Research & Capital Group in Atlanta. “It shows that a lot of investors are banking on the fact that the economy is getting better in the second half of the year. I don’t know how realistic that is.”

Volume in electronic trading on the exchange was 409,576 contracts as of 3:01 p.m. in New York. Volume totaled 482,776 contracts yesterday, down 1.7 percent from the average over the past three months. Open interest yesterday was 1.25 million contracts. The exchange has a one-business-day delay in reporting open interest and full volume data.

Supplies at Cushing, Oklahoma, where oil traded on Nymex is stored, climbed 2.5 percent to 34.3 million barrels last week, the highest since at least April 2004, when the department began keeping records for the location.

“The Cushing storage situation should lead to increased volatility, especially near expiration, because of delivery concerns,” Edmonds said.

Gasoline rose after U.S. supplies climbed less than expected last week. Inventories increased 362,000 barrels to 220.2 million in the week ended Jan. 30, the report showed. An 800,000-barrel gain was forecast, according to the Bloomberg News survey.

Gasoline Rises

Gasoline futures for March delivery climbed 5.14 cents, or 4.4 percent, to settle at $1.2184 a gallon in New York. Heating oil increased 0.16 cent to end the session at $1.327 a gallon.

Regular gasoline at the pump, averaged nationwide, rose 1 cent to $1.90 a gallon, AAA, the largest U.S. motorist organization, said on its Web site today. Prices have declined 54 percent from the record $4.114 a gallon reached on July 17.

U.S. fuel demand during the past four weeks averaged 19.5 million barrels a day, down 2.8 percent from a year earlier, the Energy Department report showed.

“Demand is still weak even though prices are down,” said Chip Hodge, a managing director at MFC Global Investment Management in Boston, who oversees a $9 billion natural-resource- company bond portfolio. “People are turning their thermostats lower and driving a bit less because of the awful job picture.”

Oil prices dropped after U.S. equities retreated as disappointing earnings at Kraft Foods Inc. and Walt Disney Co. triggered a selloff in consumer shares. The Standard & Poor’s 500 Index lost 0.8 percent to 832.23, erasing an earlier gain of 1.6 percent.

Stock Market Reverses

“The reversal on the stock market also dragged” the oil market lower, “and the only real strength coming out of the numbers this morning was gasoline,” said Tom Knight, trading director at Truman Arnold Cos. in Texarkana, Texas. “We’re only holding where we are right now because of the strength in the gasoline.”

Prices are “firming up” because of output constraint by the Organization of Petroleum Exporting Countries, and further cuts may not be necessary, Libya’s top oil official, Shokri Ghanem, said in an interview today. OPEC, supplier of more than 40 percent of the world’s oil, may not need to reduce output when it meets on March 15 in Vienna, Ghanem said.

OPEC decided on Dec. 17 to trim production by 9 percent beginning on Jan. 1. The 12-member group pumped an average 28.565 million barrels a day last month, down 1.05 million from December, according to a Bloomberg News survey of oil companies, producers and analysts.

“OPEC is showing a willingness to cut again and is doing a good job adhering to quotas,” Hodge said. “It won’t be enough of an impetus to move prices higher alone. We need to see demand recover for that to occur.”

Brent crude oil for March settlement rose 7 cents to $44.15 a barrel on London’s ICE Futures Europe exchange.