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Crude Caps Biggest Weekly Drop in 19 Months as Fuel Supply Gains

Jan. 3 (Bloomberg) -- West Texas Intermediate crude fell, capping the biggest weekly decline in 19 months, after a government report showed that U.S. supplies of distillate fuel and gasoline climbed.

Futures dropped 1.6 percent today and 6.3 percent this week. The Energy Information Administration said stockpiles of distillate fuel, including heating oil and diesel, rose 5.04 million barrels last week to 119.1 million. Gasoline inventories gained 844,000 barrels to 220.7 million. Fuel demand tumbled 7.2 percent, the most since January 2012. Crude supplies slid as Gulf Coast refiners curbed deliveries to reduce local taxes.

“The big build in distillate fuel is the main feature of the report,” said John Kilduff, partner at Again Capital LLC a New York-based hedge fund that focuses on energy. “Distillate is the seasonal leader and strong demand for it had been driving prices higher. The demand appears to have fallen away.”

WTI for February delivery decreased $1.48 to $93.96 a barrel on the New York Mercantile Exchange. It was the lowest settlement since Dec. 2. Today’s move capped the biggest weekly decline since June 2012. The volume of all contracts traded was 8.8 percent lower than the 100-day average at 3:43 p.m.

Brent for February settlement slipped 89 cents, or 0.8 percent, to end the session at $106.89 a barrel on the London- based ICE Futures Europe exchange. Volume 2.6 percent below the 100-day average. The European benchmark closed at a $12.93 premium to WTI.

Inventories of distillate fuel were forecast to advance 750,000 barrels, according to the median of eight analyst responses in a Bloomberg survey. Gasoline stockpiles were projected to rise 1.38 million barrels.

Tumbling Consumption

Total fuel demand dropped to 19 million barrels a day in the week ended Dec. 27, the lowest level since October, the report showed. Consumption of distillate fuel tumbled 21 percent to percent to 3.31 million. It was the biggest decline in distillate use since July 2003.

Ultra low sulfur diesel futures for February delivery declined 4.73 cents, or 1.6 percent, to $2.9394 a gallon in New York. It was the lowest settlement for diesel since Nov. 19. Gasoline for February delivery slipped 4.62 cents, or 1.7 percent, to settle at $2.6488 a gallon.

Refineries operated at 92.4 percent of capacity, down 0.3 percentage point from the prior week, when the rate was at the highest level since July.

Crude inventories tumbled 7.01 million barrels to 360.6 million barrels, bringing the five-week decrease to 30.8 million, according to the EIA, the Energy Department’s statistical arm. The report was projected to show a 2.83 million-barrel decline, according to the survey.

Seasonal Pattern

“There was a larger-than-expected drop in crude oil inventories,” said Tim Evans, an energy analyst at Citi Futures in New York. “The crude number should be followed by an asterisk because it’s a regular development for supplies to fall before the end of the year. This most likely indicates management of deliveries by refiners, not a shortage of supply.”

Crude supplies at Cushing, Oklahoma, the delivery point for WTI traded in New York, declined 552,000 barrels to 39.6 million, the report showed.

U.S. crude production increased 10,000 barrels a day to 8.12 million. Output surged to the most since 1988 as the combination of horizontal drilling and hydraulic fracturing, or fracking, has unlocked supplies trapped in shale formations.

Imports of crude oil slipped 0.5 percent to 7.5 million barrels a day, the report showed. Fuel imports tumbled 18 percent to 1.32 million barrels a day, the least since 1997.

Libyan Output

Oil also fell as Libya prepared to boost output. Workers at the 300,000-barrel-a-day Al Sharara site announced yesterday that they would cease protests for two weeks, Muftah Lamin, a spokesman for the protesters, said yesterday by phone. The action that shut down the plant will resume if their requests, which include services for the city, aren’t met within two weeks, Lamin said.

“We should expect a further import drop this year because production is rising here,” Evans said. “The report had bullish elements but they weren’t sufficient to outweigh bearish factors such as the return of some Libyan oil to the market.”

Libyan output was unchanged at 210,000 barrels a day in December, the lowest level since September 2011, a Bloomberg survey showed. Production averaged 1.28 million in the first six months of last year before tumbling.

The dollar climbed to a one-month high against the euro on speculation that the Federal Reserve will reduce stimulus. A stronger U.S. currency makes dollar-denominated commodities less appealing as an investment.

Dollar Strength

“A large part of the move lower is connected to the dollar’s strength,” said Michael Lynch, president of Strategic Energy & Economic Research in Winchester, Massachusetts. “The tapering of stimulus is giving the dollar a boost.”

Implied volatility for at-the-money WTI options expiring in February was 18.3 percent, down from 19.6 percent yesterday, data compiled by Bloomberg showed.

Electronic trading volume on the Nymex was 438,425 contracts at 3:44 p.m. It totaled 544,194 contracts yesterday, 2.4 percent above the three-month average. Open interest was 1.63 million contracts.

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