Crude Oil Drops After Report Shows Increase in U.S. Inventories

March 18 (Bloomberg) -- Crude oil dropped from a three- month high after a U.S. government report yesterday showed inventories posted a larger-than-expected gain last week and refiners processed less fuel.

Oil stockpiles increased 4.66 million barrels to 349.9 million barrels, the Washington-based American Petroleum Institute said in a report released after the close of trading yesterday. That’s the highest since the week ended June 29, 2007. Refineries operated at 82.3 percent of capacity, down 1.4 percentage points from the week before, API said.

“The crude oil data was bearish, with a larger-than- expected 4.7-million-barrel-build,” Tim Evans, an energy analyst with Citi Futures Perspective in New York, said in an e- mail. “However, the rise was at odds with the reported 1.3 million-barrel-a-day drop in crude oil imports, and the total of 349.9 million barrels is still 1.4 million barrels less than last week’s DOE total.”

Crude oil for April delivery fell 48 cents, or 1 percent, to $48.68 a barrel on the New York Mercantile Exchange at 9:59 a.m. in Sydney. Yesterday, April futures rose $1.81, or 3.8 percent, to $49.16 a barrel, the highest settlement since Dec. 1. Prices have increased 10 percent so far this year.

“The API crude number is bearish, but with a question mark or two behind it,” Evans said.

Futures rose yesterday on optimism about the U.S. economy after a report showed that housing starts in the world’s biggest energy-consuming country surged in February.

New Homes

The Commerce Department report showed that work began on 583,000 homes at an annual rate, a 22 percent increase from January. Oil prices have plunged from a record $147.27 in July as the U.S., Europe and Japan face recessions. Gasoline and heating-oil futures prices surged, with the motor fuel reaching the highest in four months.

“There’s a feeling that maybe the economy has hit the bottom,” said Chip Hodge, a managing director at MFC Global Investment Management in Boston, who oversees a $9 billion natural-resource-company bond portfolio. “For the first time in a while we aren’t looking at mostly negative headlines.”

The unexpected gain in housing starts and speculation about Fed policy also pushed U.S. equities higher. The Standard & Poor’s 500 Index climbed 3.2 percent to 778.12 yesterday. The Dow Jones Industrial Average rose 2.5 percent to 7,395.78.

“The Dow is being looked at as a strong indicator of where the economy is going, making it a primary driver of the oil market,” said Rick Mueller, a director of oil markets at Energy Security Analysis Inc. in Wakefield, Massachusetts.

OPEC Quotas

Algerian Oil Minister Chakib Khelil said OPEC’s compliance with quotas will improve to about 95 percent by the time the group meets in May. The Organization of Petroleum Exporting Countries may still “take strong” measures to protect revenue should prices keep falling, Khelil, who held the group’s rotating presidency in 2008, said at a press briefing in Vienna.

OPEC agreed to hold output targets steady at its meeting in Vienna on March 15 on concern higher prices could harm an ailing global economy. Ministers pledged to tighten compliance with record cutbacks agreed on last year after crude oil fell more than $100 from July’s record.

“Even though OPEC didn’t enact a new cut, there’s no question that a substantial amount has already been taken off the market,” Mueller said.

Oil also rose because April options expire at the close of trading in New York today. April $50 calls, which represent the right to buy oil at that price, were the most-actively traded options contracts on the Nymex yesterday.

Today’s Report

An Energy Department report today is forecast to show that U.S. crude oil inventories rose 1.5 million barrels last week, according to the median of 14 analyst estimates in a Bloomberg News survey. The department is scheduled to release its weekly report today at 10:30 a.m. in Washington.

“If we don’t start to see U.S. supplies taper off in the next couple weeks and increased demand, it will raise doubts about OPEC compliance,” said Gene McGillian, an analyst and broker at Tradition Energy in Stamford, Connecticut. “For this reason there will be a lot of attention paid to the inventory reports over the next two to three weeks.”

Gasoline stockpiles probably dropped 1.5 million barrels from 212.5 million the prior week, according to the survey. Supplies of distillate fuel, a category that includes heating oil and diesel, probably rose 1 million barrels from 145.4 million, the survey showed.

Brent crude oil for May settlement increased $1.78, or 3.8 percent, to $48.24 a barrel on London’s ICE Futures Europe exchange yesterday.