Despite an unexpectedly large decline in U.S. oil inventories, oil futures dropped slightly Thursday, undermined by a stronger U.S. dollar and shrinking hopes for aggressive U.S. stimulus measures.
Light, sweet crude for August delivery settled 44 cents, or 0.5%, lower at $87.22 a barrel on the New York Mercantile Exchange.
China's central bank and the European Central Bank both cut interest rates in moves designed to stimulate their economy, which narrowed the difference between their interest rates and those of the U.S., making the dollar attractive.
The U.S. Dollar Index, which compares the U.S. currency against a basket of other currencies, increased 1.26%. Since crude oil is traded in dollars, a stronger dollar renders oil more costly for buyers who use other currencies.
"Some of the biggest moves we see in oil are when we get these rate differentials," said Phil Flynn, senior market analyst at the Price Futures Group in Chicago, a brokerage firm.
Analysts also said futures prices were weighed down by the possibility that the U.S. employment picture was improving. Usually, a low unemployment rate is very bullish for oil, indicating more people are driving to work and have more discretionary cash.
But now market participants fear a too rosy outlook will lessen the prospects of stimulus measures by the U.S. Federal Reserve. Oil has risen in the past when the Federal Reserve has tried to stir a stagnant economy.
Analysts and traders pointed to a surprisingly strong jobs report by payroll processing company Automatic Data Processing. The group said firms added 176,000 jobs last month compared with the expectation of a 108,000 gain, according to analysts.
The report came on the eve of Friday's widely watched nonfarm payrolls report. The stronger job results makes it less likely the U.S. will undertake another round of quantitative easing to boost the economy, said Kyle Cooper, a managing partner at IAF Advisors.
"U.S. petroleum prices have been led much more by macro events as opposed to being led by the U.S. petroleum data," Mr. Cooper said.
Despite the bearish signs, oil futures briefly rallied on the inventory report from the U.S. Energy Information Administration, which showed U.S. oil stocks fell by 4.3 million barrels in the week ended June 29 versus the 1.4 million barrel draw anticipated by analysts -- indicating a tightening of supplies.
The report also showed gasoline stockpiles rose by only 151,000 barrels, less than the rise of 500,000 barrels predicted in the Dow Jones Newswires survey. Meanwhile, inventories of distillates, such as heating oil and diesel, fell 1.051 million barrels, compared to a survey prediction of a gain of 300,000 barrels.
"There was nothing bearish in this report," said Tim Evans, an analyst at Citi Futures Perspective.
Yet the price rally from the inventory report was short-lived, in part because market watchers said the result reflected the one-time effects of Tropical Storm Debby, which disrupted production in the Gulf of Mexico.
Still, several analysts highlighted that demand for finished motor gasoline increased to 19.6 million gallons from 19 million.
"We may have started the summer demand season a little late, but... I believe that we are going to see the summer demand carry later into the year," said Carl Larry, an analyst at Oil Outlooks & Opinions, in a research note.
While, U.S. oil futures fell, Brent crude-oil futures, the European benchmark, strengthened on news that an oil field strike in Norway was expanding. Prospects of less supply sent Brent futures up 93 cents, or 0.9%, to $100.70 a barrel at the settlement on IntercontinentalExchange.
Norway's Statoil said it was preparing to shut down production as the country's oil industry association disclosed a lockout starting midnight Monday after talks over a new labor contract broke down.
Statoil said the shortfall in its production will be around 1.2 million barrels of oil equivalent a day.
Front-month reformulated gasoline blendstock, or RBOB, settled at $2.76 a gallon, up 4.2 cents. Front-month heating oil settled at a $2.77 a gallon, up 1 cent.
Copyright (c) 2012 Dow Jones & Company, Inc.
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