Crude-oil futures prices dropped 0.9% Wednesday as U.S. crude-oil inventories rose to their highest levels since September 1990.
Analysts said the market isn't fully reflecting the weak oil supply-demand fundamentals as it awaits further signs on the direction of the U.S. economy.
"We shook some of the weaker 'longs' out of the market, but some of the new 'longs' may hold their guns if the U.S. economy is starting to strengthen," said Gene McGillian, broker and analyst at Tradition Energy. He was referring to investors who have been buying crude-oil futures in recent days, anticipating that an improving economy will spark oil-demand growth and boost prices.
"The market is not taking direction from fundamentals, clearly," he said, referring to the relatively muted price reaction to bloated inventories in the world's biggest oil consumer.
Light, sweet crude oil for June delivery on the New York Mercantile Exchange settled 94 cents, or 0.9%, lower at $105.22 a barrel. The contract had settled at a one-month high of $106.16 a barrel a day earlier.
ICE June Brent dropped 1.2%, or $1.46, to $118.20 a barrel, the lowest level since April 24. The Brent price premium to the U.S. benchmark dropped to $12.98 a barrel, the lowest level since Jan. 31.
"Until there are signs that the U.S. economy is going south or that all of Europe is in recession, we'll see some buoyancy," McGillian said. "For now, the market is avoiding the fundamentals, but I don't think it can do that for very long."
U.S. crude-oil inventories rose by a higher-than-expected 2.8 million barrels in the week ended April 27 and now stand at the 19th highest level on record since the Energy Information Administration began tracking weekly inventories in August 1982. The last time crude-oil stocks were higher than they currently are, Nymex crude oil was near $30 a barrel, up from the low $20s just weeks earlier before Saddam Hussein sent Iraqi troops into Kuwait.
Inventories at Cushing, Okla., the delivery point for the Nymex contract, hit a record high near 43 million barrels last week, having climbed 11.5% over the past six weeks. Companies have been rushing oil to Cushing ahead of the reversal of the Seaway Pipeline later this month, which will allow the crude oil to flow from landlocked and hard-to-access storage in Midwest to the key Gulf Coast refining region.
The Gulf Coast will then have the advantage of more domestic crude oils being able to compete with higher-priced international crude oils, such as North Sea Brent, the European benchmark. ICE Brent futures have fallen about $7 a barrel in recent weeks in anticipation of the coming competition.
The record-high Cushing level features in the Midwest regional crude-oil stocks that are at their highest since May 2011. Gulf Coast crude-oil inventories also are at a one-year high, near 185 million barrels and about 15 million barrels below their record high near 200 million barrels set three years ago. Stocks in the Rocky Mountains area were at the highest level since June 2010 and 8.2% above a year ago.
The rising inventories are due in part to increased domestic production. EIA data show crude-oil output of 6.121 million barrels a day last week, up 8.9%, or about 500,000 barrels a day, above a year ago and the most since November 1999. Year-to-date crude-oil output is up 5.7%, or 315,000 barrels a day, from the same period in 2011.
The EIA said gasoline stocks nationwide dropped by two million barrels, more than the expected 900,000-barrel decline. Distillate stocks--diesel fuel and heating oil--fell 1.9 million barrels, far more than the 300,000-barrel fall that was expected.
Meantime, gasoline inventories on the East Coast remain above year-ago levels, despite being the lowest since November 2011. In the Northeast, stocks of 31.5 million barrels are 15.6% above a year ago, even as worries persistent about the impact of refinery closures and potential shutdowns on supply.
"Stocks are holding up fairly well even with the refinery outages and such," said EIA analyst James Beck. "We're higher than we were last year at this time."
Nymex June reformulated gasoline blendstock futures fell 2.14 cents to settle at $3.0757 a gallon, the lowest level since Feb. 21. June heating-oil futures settled 3.46 cents lower, at $3.1425 a gallon.