U.S. Oil Ekes Out Gain; Global Futures Rise on Iraq Violence

By Christian BerthelsenDow Jones Newswires

U.S. oil futures rose slightly Wednesday, with the market giving back stronger gains after a seemingly bullish report on domestic crude stockpiles revealed more negative factors.

Light, sweet crude for July delivery settled up five cents, or 0.1%, at $104.40 a barrel on the New York Mercantile Exchange. Prices rose as much as 46 cents during the morning session after the release of weekly stockpile data from the U.S. Energy Information Administration.

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Prices for the global Brent contract rose 43 cents, or 0.4%, to $109.95 a barrel on the ICE Futures Europe exchange after Islamist militants seized control of two cities in northern Iraq.

In the U.S., the headline numbers in the official EIA data were a boon to the market at first glance, with a nationwide drop in crude stockpiles of 2.6 million barrels, more than the average estimate of analysts and a reversal of the prediction by industry group the American Petroleum Institute, which had calculated an increase based on its own research. The report contained other seemingly bullish numbers, including another supply drawdown at the delivery point for the benchmark U.S. contract in Cushing, Okla., and imports well below year-ago levels.

But stocks of refined gasoline rose far more than expected and demand fell for the second week in a row. Data on distillates such as heating oil and diesel told a similar story, with supplies rising and demand down.

The data also showed a 16% increase in domestic oil production over last year, more than overcoming the decline in imports. In addition, more than half of the reduction in overall stockpiles came from the West Coast, a marginal factor in the nation's supply-and-demand balance.

"That doesn't really paint a strong fundamental picture because we're not seeing any significant increases in demand," said Tradition Energy brokerage analyst Gene McGillian.

And though the amount of oil in storage declined, the stockpiles remain near record highs set in late April.

"We don't have real tightness here in terms of U.S. crude-oil supplies," said Citigroup analyst Tim Evans.

Analysts said the Brent market was reacting to flaring instability in Iraq, which had been making progress in rebuilding its oil industry and had been looked to recently as a source of oil to replace production from Libya, where output has tanked amid infighting and turmoil. Islamic militants have overtaken the northern Iraqi cities of Mosul and Tikrit, after already seizing control of the western city of Fallujah.

All of Iraq's roughly 2.5 million barrels per day of crude exports currently come from its southern region, but the central government's inability to secure large portions of the country is raising deeper concerns about supply disruptions.

"Although attention on Iraq has faded over the past two years," Macquarie analysts said in a note, "we have continued to believe that the political stability there was at best fragile. If the current situation overflows into oil-supply disruption, the total volume at risk could be material."

Speaking at a meeting of ministers from the Organization of the Petroleum Exporting Countries in Vienna, Iraq's oil minister said exports remained safe. OPEC delegates voted to continue the group's official production quota at 30 million barrels a day, in line with expectations.

Market prices for refined products jumped Wednesday, likely because of a steep reduction in refinery operating rates of 2.9 percentage points to 87.9% of capacity, analysts said, raising the prospect of stronger drawdowns on existing inventories.

Front-month July reformulated gasoline blendstock, or RBOB, ended 2.63 cents, or 0.9%, higher at $3.0008 a gallon. July diesel rose 2.02 cents to settle at $2.9043 a gallon.