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Oil Declines to Six-Week Low as U.S. Inventories Climb Amid Weak Demand

02 Feb 2012

Oil fell to a six-week low in New York as U.S. supplies climbed and fuel demand tumbled. Brent crude in London traded at the biggest premium to the American benchmark grade in 12 weeks.

Futures declined for a fifth day after the Energy Department reported yesterday that crude supplies in the U.S. rose to a three-month high last week. Total fuel use dropped 8.3 percent to 17.7 million barrels a day, the least since 1999. Tension over Iran’s nuclear program may ease after United Nations inspectors announced more talks in Tehran.

“The market is looking heavy because supplies are rising and demand is very weak,” said Phil Flynn, an analyst at PFGBest in Chicago. “A major reason for the recent rise in prices was concern about Iran. The hyperbole about the Iranian situation has calmed down.”

Crude oil for March delivery declined $2, or 2 percent, to $95.61 a barrel at 12:16 p.m. on the New York Mercantile Exchange. Futures dropped as low as $95.51, the lowest level since Dec. 20. Prices are down 3.3 percent this year.

Brent oil for March settlement dropped 31 cents to $111.25 a barrel on the London-based ICE Futures Europe exchange.

The European benchmark contract’s premium to West Texas Intermediate futures widened to as much as $15.71, the most since Nov. 14. Brent exceeded the price of Nymex oil by a record of $27.88 on Oct. 14 before narrowing to $6.82 in intraday trading on Jan. 3.

Dramatic Move

“The Brent premium to WTI came in quite dramatically late last year,” said Mike Wittner, head of oil market research atSociete Generale in New York. “It looks like we’re trying to find a balance after that big move. I don’t think the spread is heading for $20 or $25 again.”

Gasoline consumption decreased to 7.97 million barrels a day, the lowest level since September 2001, according to Energy Department data. Stockpiles of the fuel increased 3.02 million barrels last week, the report showed yesterday.

Crude oil supplies rose 4.18 million barrels to 338.9 million in the week ended Jan. 27. Inventories at Cushing, Oklahoma (DOESCROK), the delivery point for New York-traded futures, advanced 1.48 million barrels to 30.1 million last week, the biggest gain since March.

Weak Demand

“Demand looked weak across the board, which is going to weigh on the entire U.S. energy complex,” Wittner said. “It’s now February and refineries have already started planned maintenance, which explains the rise in Cushing supplies.”

Refineries operated at 81.8 percent of capacity, down 0.4 percentage point from the week before. It was the lowest operating rate since May. Units are often idled for maintenance in February as attention shifts away from heating oil and before gasoline use rises.

“The bears worried about poor demand,” said Christopher Bellew, a senior broker at Jefferies Bache Ltd. in London, who expects Brent crude to trade in a range of $110.50 to $112.50 a barrel this week. “But Iran is still a cause for concern.”

Oil in New York surged to $103.74 a barrel on Jan. 4, the highest level since May 11, on concern that rising tension between Iran and the West would lead to a disruption of shipments from the Persian Gulf. The country has threatened to close the Strait of Hormuz, the transit point for about a fifth of global oil, if its exports are banned.

International Atomic Energy Agency inspectors are preparing for more talks over the “possible military dimensions to Iran’s nuclear program,” the Vienna-based agency said yesterday in astatement after a three-day visit that ended Jan. 31. The team will return to Tehran for talks on Feb. 21 and Feb. 22.