Bloomberg News

Oil Falls to Six-Week Low as U.S. Supply Climbs Amid Weak Demand

February 03, 2012

Feb. 2 (Bloomberg) -- Oil declined to a six-week low in New York as U.S. supplies climbed and fuel demand tumbled. Brent crude in London traded at the biggest premium to the American benchmark grade in 12 weeks.

Futures fell for a fifth day, capping the longest stretch of downward moves since August, after the Energy Department reported yesterday that oil supplies rose to a three-month high last week. Fuel use dropped 8.3 percent to 17.7 million barrels a day, the least since 1999. Tension over Iran’s nuclear program may ease after UN inspectors announced more talks in Tehran.

“The market is looking heavy because supplies are rising and demand is very weak,” said Phil Flynn, an analyst at PFGBest in Chicago. “A major reason for the recent rise in prices was concern about Iran. The hyperbole about the Iranian situation has calmed down.”

Crude oil for March delivery declined $1.25, or 1.3 percent, to $96.36 a barrel on the New York Mercantile Exchange, the lowest settlement since Dec. 19. Prices are down 2.5 percent this year.

Brent oil for March settlement rose 51 cents, or 0.5 percent, to end the session at $112.07 a barrel on the London- based ICE Futures Europe exchange. It was the highest close since Jan. 11.

The European benchmark contract’s premium to West Texas Intermediate futures widened to $15.71, the most since Nov. 10. Brent’s premium rose to a record of $27.88 on Oct. 14 before narrowing to $6.82 in intraday trading on Jan. 3.

Dramatic Move

“The Brent premium to WTI came in quite dramatically late last year,” said Mike Wittner, head of oil market research at Societe Generale in New York. “It looks like we’re trying to find a balance after that big move. I don’t think the spread is heading for $20 or $25 again.”

Gasoline consumption decreased to 7.97 million barrels a day, the lowest level since September 2001, according to Energy Department data. Stockpiles of the fuel increased 3.02 million barrels last week, the report showed yesterday.

“Gasoline supplies rose 3 million barrels even though production was down because demand is so weak,” said Stephen Schork, president of the Schork Group in Villanova, Pennsylvania.

Crude oil supplies rose 4.18 million barrels to 338.9 million in the week ended Jan. 27. Inventories at Cushing, Oklahoma, the delivery point for New York-traded futures, advanced 1.48 million barrels to 30.1 million last week, the biggest gain since March.

Weak Demand

“Demand looked weak across the board, which is going to weigh on the entire U.S. energy complex,” Wittner said. “It’s now February and refineries have already started planned maintenance, which explains the rise in Cushing supplies.”

Refineries operated at 81.8 percent of capacity, down 0.4 percentage point from the week before. It was the lowest operating rate since May. Units are often idled for maintenance in February as attention shifts away from heating oil and before gasoline use rises.

“The bears worried about poor demand,” said Christopher Bellew, a senior broker at Jefferies Bache Ltd. in London, who expects Brent crude to trade in a range of $110.50 to $112.50 a barrel this week. “But Iran is still a cause for concern.”

Oil in New York surged to $103.74 a barrel on Jan. 4, the highest level since May 11, on concern that rising tension between Iran and the West would lead to a disruption of shipments from the Persian Gulf. The country has threatened to close the Strait of Hormuz, the transit point for about a fifth of global oil, if its exports are banned.

UN Inspectors

International Atomic Energy Agency inspectors are preparing for more talks over the “possible military dimensions to Iran’s nuclear program,” the Vienna-based agency said yesterday in a statement after a three-day visit that ended Jan. 31. The team will return to Tehran for talks on Feb. 21 and Feb. 22. The IAEA is the United Nations’ nuclear agency.

“The scheduled return of the UN inspectors to Iran is calming the market,” said Michael Lynch, president of Strategic Energy & Economic Research in Winchester, Massachusetts. “We don’t know yet if this is just stalling, or whether this will lead to negotiations. Sanctions are hurting the Iranian economy and they might be ready for a deal this time.”

The Organization of Petroleum Exporting Countries will export 23.52 million barrels of crude a day in the four weeks to Feb. 18, 1.1 percent more than the 23.26 million barrels in the period to Jan. 21, Halifax, England-based tanker-tracker Oil Movements said in an e-mailed report. The figures exclude Angola and Ecuador.

OPEC production rose to a three-year high of 30.9 million barrels a day in January as Libyan output rebounded, a Bloomberg News survey showed on Jan. 31.

“OPEC keeps increasing production,” Flynn said. “There’s no shortage of oil.”

Oil volume in electronic trading on the Nymex was 654,558 contracts as of 3:09 p.m. in New York. Volume totaled 618,838 yesterday, 6 percent above the three-month average. Open interest was 1.42 million contracts, the most in three months.

--With assistance from Grant Smith and Sherry Su in London. Editors: Richard Stubbe, Bill Banker

To contact the reporter on this story: Mark Shenk in New York at mshenk1@bloomberg.net

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


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