Oil Futures Dealt a Blow from Surprise Gasoline Build

Oil prices took a hit on the New York Mercantile Exchange on Wednesday, settling below $78 as government data showed a surprise build in gasoline inventories, the greenback's value rose and Wall Street suffered a drop in the Dow Jones Industrials Average, Nasdaq and S&P Indexes.

The price of light, sweet crude for December delivery plunged more than $2 from yesterday's close to settle at $77.46 a barrel on the NYMEX Wednesday. Oil prices had recently traded closer to $80 a barrel, spurred by a weakening in the U.S. dollar's value for much of October. However, the dollar's value started to pare losses against a basket of foreign currencies this week, causing oil prices to retreat.

Gasoline Build Weighs on Oil Prices

Commodity prices usually come under pressure when the U.S. Energy Information Administration issues its weekly inventory report on Wednesday. Today was no exception, as the newly released data indicated a sharp increase in gasoline inventories last week.

"Oil prices were a little weak going into the DOE report due to the weakness in global equities, but the surprise build in gasoline inventories really took the market back," said Bill O'Grady, chief markets strategist at St. Louis-based Confluence Investment Management LLC.

"We were looking for a decline of about a million barrels in inventories, but they actually rose 1.7 million barrels, and this occurred with weak demand," O'Grady explained.

"Refiners are showing a pretty significant bias to gasoline in the data, probably in part to try to whittle down some of the huge inventory overhang in distillate fuels. That, unfortunately for the market, led to a much bigger-than-expected number in gasoline inventories, which really hit the market hard," the analyst underscored.

Natural Gas Bets on the Weather

Additionally, the price of natural gas tumbled nearly 27 cents during today's trading session to settle at $4.289 per thousand cubic feet. The energy commodity may be experiencing a sell-off due to changes in seasonal temperatures, which can affect prices in the near term.

"The natural gas market has benefited greatly from the October cold snap. It probably has prevented it from hitting inventory capacity, which has been a significantly good event for gas prices because if the market would have hit capacity, it's hard to tell how far prices would have declined," O'Grady said.

He continued, "Both the 6-to-10 day and 8-to-14 day forecasts show a significant warming trend, which is going to be a big reversal to what we're seeing now. We had winter storm warnings in the front range of the Rockies today, so we are getting some early winter weather, especially out West. It's been a pretty cold October, but it looks like early November is going to be unusually mild."

"That being said, warm weather in early November will not be helpful to natural gas prices," O'Grady warned, "and I think that's what the natural gas market is starting to grapple with."