Crude futures dropped 2% Wednesday on a government report showing rising fuel supplies and signs that the Federal Reserve may be closer to winding down stimulus efforts.
Light, sweet crude for July delivery settled $1.90 lower at $94.28 a barrel on the New York Mercantile Exchange. Brent crude on the ICE futures exchange fell $1.31 to settle at $102.60 a barrel.
U.S. gasoline stockpiles rose by three-million barrels last week, according to the Energy Department, surprising analysts who had forecast a 100,000-barrel decline, as fuel imports surged ahead of the Memorial Day weekend.
Analysts and traders view Memorial Day as the start of summer-driving season in the U.S., when gasoline demand rises as drivers hit the roads for vacation and other travel. The data inspired confidence among oil traders that supplies will be able to keep pace with demand.
Gasoline inventories rose to 220.7 million barrels, 9.8% higher than this time last year. That's the highest surplus to the year-earlier period since August, 2010.
"We're heading into the heart of driving season with plenty of inventories," said Andy Lebow, an oil broker at Jefferies Bache in New York. "The big build is bearish, there's no way around it."
Gasoline futures for June delivery fell 2.64 cents to $2.8194 a gallon, on pace for the lowest settlement since May 2.
Later in the session, oil extended losses after minutes from the Fed's May policy meeting showed Fed officials are growing comfortable with slowing the central bank's stimulus measures.
While Fed officials are still concerned about the strength of the economy, if conditions continue to improve, some officials could be willing to reduce the pace of the Fed's bond-buying program as early as the June meeting.
Gold futures, along with equity markets, also slumped following the release of the meeting minutes.
"Crude is responding to its own market as well as the general stimulus concerns," said Jason Schenker, president of Prestige Economics.
U.S. oil futures rose to seven-week highs on Friday, but have moved lower since then as traders worry that the broader economy isn't strong enough to support a rebound in fuel demand.
Data released late Tuesday from the American Petroleum Institute, an industry group, also showed an unexpected build in crude oil and product stocks last week.
In the EIA report Wednesday, stocks of distillate, which include heating oil and diesel, fell by 100,000 barrels. Analysts had expected a 700,000 barrel increase.
June heating oil settled 2% lower at $2.8714 a gallon.
Copyright (c) 2012 Dow Jones & Company, Inc.
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