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Crude Ends Down for Third Day, But Above Day's Lows

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Crude oil futures settled lower for a third straight day Wednesday, but recovered from steep losses amid an afternoon rally in U.S. equities prices.

Traders said the market continues to show strong concerns about weakness in oil demand in the world's biggest oil consumer. Sluggish demand could turn far worse, analysts said, if Washington fails to reach agreement on budget issues by year end and avoid the so-called fiscal cliff. Equiity markets found reason to rally amid a cacophony of comments on the issue and a flurry of gatherings.

Treasury Secretary Timothy Geithner, the White House's lead negotiator in the deficit-reduction talks, will meet with House Speaker John Boehner and other congressional leaders Thursday as both sides try to broker a tax and spending deal before the end of the year.

Front-month U.S. crude oil prices were off by a sharp 2.1% in early trading, but declines were tempered by news of an unexpected modest drop in U.S. crude oil inventories last week amid a surge in refinery operations.

Data from the Energy Information Administration showed steep declines in implied demand for gasoline and distillate fuel [diesel/heating oil] last week, but some analysts attributed those to abnormalities in the Thanksgiving holiday week, when deliveries of fuel from primary storage facilities like refineries and terminals may have occurred.

Still, said Kyle Cooper, managing partner at IAF Advisors in Houston, "there is still a ton of crude" in the market, while "distillate inventories are tight."

Light, sweet crude oil futures for January delivery on the New York Mercantile Exchange settled 69 cents, or 0.8%, lower, at $86.49 a barrel. The contract recovered from an intraday low of $85.36 a barrel, but still ended at the lowest level since Nov. 16. Crude dropped $1.10 over the two previous days.

ICE Brent crude oil for January delivery settled down 36 cents at $109.51 a barrel, also the lowest since Nov. 16.

U.S. refiners lifted crude runs by 1.9% in the week to a three-month high of 15.174 million barrels a day. That was up more than 600,000 barrels a day from a year earlier and a five-year high for the week.

But despite the stronger demand from refiners crude stocks are sufficient to cover 24.7 days of current demand, ahead of the five-year average of 23.5 days. Stocks dropped 347,000 barrels in the week to a one-month low, despite a 100,000-barrel rise in domestic output, to 6.8 million barrels a day, the most since February 1994, due to higher flows from shale-oil fields. Refiners in the key Gulf Coast region set a record for crude runs at this time of year, processing about 8.1 million barrels a day last week, a 12% increase from a year earlier, EIA data show.

Distillate stocks fell by 800,000 barrels nationwide last week, to 112 million barrels. That's the lowest level for this time of year on EIA data beginning in 1982 and the weakest in any week since May 2008.

Despite that drop, though, stocks in the Northeast U.S., the main heating-oil-consuming region, rose by 1.36 million barrels to their highest level since Oct. 26, before Hurricane Sandy hit. Still, regional stocks remain 44% lower than the five-year average for the week.

Distillate demand in the past four weeks is struggling to top year-earlier levels, which were depressed by unusually warm weather.

Four-week distillate use hit its highest level in 11 months, but was 0.3% below a year earlier. Distillate use in the week ended Nov. 23 fell 364,000 barrels a day from a week earlier, to 3.8 million barrels a day. But it was up 600,000 barrels a day from this time last year, when demand hit a 17-year low for the week amid unseasonably warm temperatures.

Gasoline stocks rose by 3.865 million barrels, more than four times the expected level, amid a week-to-week demand drop of 471,000 barrels a day. Gasoline stocks cover 24.2 days of current demand, above the five-year average of 22.9 days. Gasoline stocks in the Northeast rose to their highest level since Hurricane Sandy.

Reformulated gasoline blendstock futures for December settled up a slim 0.18 cent at $2.7339 a gallon, after trading as low as $2.6832 a gallon. Traders attributed the recovery to position adjustment ahead of the contract expiration at Friday's settlement.

December-delivery heating oil futures settled down 3.06 cents, or 1%, at $3.0465 a gallon, after an earlier low of $2.9745 a gallon.

Copyright (c) 2012 Dow Jones & Company, Inc.

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