Crude at Lowest in 8 Months as Inventories Rise

U.S. oil futures sank to their lowest level in eight months Wednesday after the government said oil inventories rose to their highest level since 1990, while gasoline demand in the U.S. fell sharply.

Crude also was weighed down by the Federal Reserve's decision to extend "Operation Twist" while stopping short of more aggressive measures.

Light, sweet crude for July delivery expired $2.23, or 2.7%, lower at $81.80 a barrel on the New York Mercantile Exchange, the lowest finish for the front-month contract since Oct. 5. The more actively traded August contract fell $2.90, or 3.4%, to settle at $81.45 a barrel.

Brent crude on the ICE Futures Europe Exchange settled $3.07, or 3.2%, lower at $92.69 a barrel, its lowest finish since Dec. 17, 2010.

The U.S. Energy Information Administration said commercial oil inventories last week rose 2.9 million barrels to 387.3 million barrels, the highest level since July 1990, reversing two weeks of falling stockpiles, amid sinking demand in the world's biggest consumer.

"Overall, demand is going no place quick," said Dominick Chirichella, analyst at the Energy Management Institute in New York. "There's too many people out of work to have a substantial impact on demand--gasoline demand in particular."

U.S. oil inventories have been elevated for months due to a combination of a weak economic recovery and rising production. Earlier this month, the EIA said U.S. oil production had risen to the highest level in 14 years.

Inventories of refined products also rose last week, the EIA said. Gasoline inventories last week rose 900,000 barrels, the EIA said. Stocks of distillates, including heating oil and diesel, increased 1.2 million barrels, while refiners cut runs by 0.1 percentage point to 91.9% of capacity.

Analysts expected oil inventories last week to fall 1 million barrels, according to a survey by Dow Jones Newswires. Gasoline stocks were expected to rise 400,000 barrels, while distillate stocks were seen rising 700,000 barrels. Refinery runs were expected to hold steady at 92%.

The EIA's indirect measure of gasoline demand fell 4.8% last week to its lowest level for the week since 2001.

Tepid gasoline demand has resulted in an unusual respite for consumers: falling prices at the pump. Auto club AAA said a gallon of regular gasoline averaged $3.487, down 20 cents from a month ago.

Front-month July gasoline futures settled 5.13 cents, or 1.9%, lower at $2.5902 a gallon.

Benchmark crude on the Nymex is down 17% this year, weighed down largely by weak demand in the U.S. and the deepening fiscal crisis in the euro zone.

Separately, crude futures were also weighed down by news from Fed that it planned to spend $267 billion to extend Operation Twist through the end of the year. The program, which was set to expire this month, is aimed at stimulating the economy by driving down long-term interest rates.

Some market participants, however, had expected more aggressive measures to juice the U.S. economy, such as another round of quantitative easing. In the past, the move has boosted oil prices, largely by weakening the dollar and making dollar-denominated commodities like oil more attractive.

"This isn't the most impactful set of accommodative monetary policy measures that's in the Fed's satchel, but its something," said Jason Schenker, president of Prestige Economics, a consultancy.

July heating oil settled down 4.77 cents, or 1.8%, to $2.5784 a gallon.


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