AP
Oil Drops Sharply on Inventory Report
Wednesday November 28, 4:06 pm ET
By John Wilen, AP Business Writer
Crude Oil Prices Extend Slide After Government Reports Supply Build at Key Midwest Terminal


NEW YORK (AP) -- Oil's rise to $100 a barrel, which seemed a done deal as recently as two days ago, was dealt a severe blow Wednesday when the government reported an increase in supplies at the Nymex delivery terminal in Cushing, Okla., which is closely watched by traders as a benchmark of oil inventory tightness.

Anemic growth in demand and a jump in refinery activity also weighed on prices, which have dropped sharply in recent days on concerns about the economy and expectations supplies will grow.

"The report ... added to the bearish sentiment in the market," said Eric Wittenauer, an energy analyst at A.G. Edwards & Sons Inc. in St. Louis. "It comes at a period in time when OPEC is boosting production ... and considering another increase in production."

Light, sweet crude for January delivery plunged $3.80 to settle at $90.62 a barrel on the New York Mercantile Exchange following Tuesday's drop of $3.28 a barrel.

That was crude's second largest two-day price decline since the Nymex introduced a futures contract in 1983. On Oct. 19 and 22, 1990, crude prices dropped $8.42.

The latest price is $8.67, or 8.7 percent, below the record price of $99.29 set last week.

While analysts caution that futures could still rebound and again threaten to reach $100 this year, most feel that's becoming less likely. Many market observers have long argued that prices were driven higher by speculators and have predicted that futures would fall sharply at some point.

At the pump, meanwhile, gas prices rose 0.5 cent overnight to a national average of $3.096 a gallon, according to AAA and the Oil Price Information Service. It was the second increase in as many days, though prices remain 1.6 cents below their most recent peak.

Analysts say gas prices are likely to remain flat or even fall unless oil rises to $100 or higher. Gas prices hit an all-time record of $3.227 a gallon in May.

Demand for gasoline continues to rise, but at a slow pace, analysts say. Gasoline demand rose last week by 134,000 barrels, and is up 0.4 percent over the last four weeks compared with the same period last year, the Energy Department's Energy Information Administration said in its weekly inventory report. That's well below the historic average year-over-year growth rate of 1.5 percent, analysts say.

"There's just more and more evidence every week that we're already seeing ... demand deterioration due to high prices," said Jim Ritterbusch, president of Ritterbusch & Associates, in Galena, Ill.

Overall demand for petroleum products fell 487,000 barrels last week.

As demand for gasoline is slowing, supplies are rising. Gasoline inventories last week jumped 1.4 million barrels, more than double the 600,000 barrel increase analysts surveyed by Dow Jones Newswires had expected. That increase came despite a 289,000 barrel decline in gasoline imports to an average of 835,000 barrels a day.

December gasoline futures dropped 9.73 cents to settle at $2.2757 a gallon on the Nymex on Wednesday.

Overall crude supplies fell during the week ended Nov. 23 by 400,000 barrels, in line with the 500,000 barrel decrease analysts had expected. But that decline was overshadowed by a 600,000 barrel increase in inventories in Cushing, Okla. Cushing inventories are up 13.4 percent in two weeks.

Activity at the Cushing terminal is studied closely by oil traders because it is the physical delivery point for Nymex crude. Falling supplies there are seen as a symptom of a tight market, and those concerns ease when Cushing inventories rise.

Crude supplies were helped by imports, which rose last week by an average of 534,000 barrels a day to 10.4 million barrels a day.

Prices were also pressured by a surprising jump in refinery activity last week of 2.4 percent, to 89.4 percent of capacity, much more than the 0.6 percent rise analysts had expected. That increase explains the unexpected jump in gasoline supplies and a surprisingly small 100,000 barrel decline in supplies of distillates, which include heating oil and diesel. Analysts had expected a 1 million barrel decline.

December heating oil slid 7.96 cents to settle at $2.5738 a gallon on the Nymex Wednesday.

"The market's been concerned about the availability of heating oil supply for the winter," Ritterbusch said.

Other energy futures also fell Wednesday. Forecasts for warmer weather in coming weeks and a view that supplies are high sent December natural gas down 35.4 cents to settle at $7.203 per 1,000 cubic feet on the Nymex. The December contract expired at the end of trading Wednesday.

In London, January Brent crude fell $2.71 to settle at $89.81 a barrel on the ICE Futures exchange.