Commodity Corner: Crude Ends Down On US Oil Use, Euro Zone Debt

Crude oil futures prices ended an erratic day lower on Thursday because of worries over weak U.S. oil demand and the prospects for progress in resolving the euro zone's debt crisis.

Oil prices swung broadly with equities and the dollar-euro exchange rate as conflicting headlines out of Europe suggested advances or roadblocks on the path toward a plan. At one point, a summit planned for this weekend appeared in doubt. But French President Nicolas Sarkozy and German Chancellor Angela Merkel later said they are aiming for a comprehensive resolution to be approved by European leaders by Wednesday at the latest.

Rich Ilczyszyn, market strategist and broker with MF Global in Chicago, said the euro-zone situation "looks really dicey" after reports that were "all over the place" in terms of progress. With nerves still on edge, many investors were staying on the sidelines, avoiding the gyrations of headline trading.

Those that were active had to make decisions on the contrary signals presented in weekly oil data in the U.S., the world's largest oil consumer. The trading day was further complicated by position adjustments tied to the expiration of the front-month, November crude oil futures contract on the New York Mercantile Exchange.

November light, sweet crude oil expired down 81 cents at $85.30 a barrel, while the incoming front-month, December, settled 22 cents lower, at $86.07 a barrel. November's 77-cent discount to December was the widest spread since the April contract expired on March 22, and reflects weak near-term demand for crude as refiners have taken down several facilities for seasonal maintenance programs.

The Energy Information Administration said Wednesday that crude oil stocks posted a steep unexpected decline led by lower imports, while gasoline and distillate (heating oil/diesel) stocks fell far more than expected. What's more, the declines erased the overhang in the market.

Crude oil stocks are the lowest since February 2010 and have dipped 0.3% below their five-year average for this week. The 6.4% deficit in crude stocks to a year ago is the biggest in more than three years. Gasoline inventories are just 0.3% above the five-year average for this week, compared with a premium of more than 5% less than a month ago. Distillate stocks are 12% below a year ago and are just 0.4% above the five-year average. In mid-September stocks were 5.5% above the five-year average.

The inventory figures were strongly bullish, but the EIA data also showed gasoline demand dropped below 8.6 million barrels a day, its lowest level since 1999 for this time of year, leading to a plunge in total demand to its lowest mid-October level since 1998.

"U.S. demand is just horrible, horrendous," said Kyle Cooper, an analyst at IAF Advisors.

Weak demand may pressure prices now, but when refiners restart operations the low inventories could spark another rally in prices, traders said.

The lone strength came in distillate demand, which was 5.8% above a year ago, and heating oil prices reflected that by outpacing all other energy futures contracts Thursday.

The death of former Libyan leader Col. Moammar Gadhafi may signal the final shot of the nation's civil war and remove political and security hurdles to the arduous task of restoring the nation's oil output and exports. David Fyfe, head of the oil markets division of the International Energy Agency, said the agency is maintaining its assumption that Libya will produce 600,000 barrels a day of oil by the end of this year and 1.4 million barrels a day by the end of 2012. Prior to the February start of the civil war, Libya was pumping 1.6 million barrels a day.

November-delivery heating oil settled 4.89 cents higher, or 1.6%, at $3.0301 a gallon. November reformulated gasoline blendstock settled 0.4 cent higher at $2.6755 a gallon.


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