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Oil drops on US gas supply report

WASHINGTON -- Crude oil prices fell for the third straight day yesterday, briefly dipping below $72 a barrel after a surprising increase in US gasoline supplies.

Analysts said selling also was spurred by the rising belief in the market that the conflict in Israel and Lebanon would not spread and not threaten Middle East oil supplies.

Federal Reserve chairman Ben Bernanke's latest assessment of a slowing economy may also have played a role, by implying that demand could weaken.

Oil futures have plunged more than 5 percent since settling at a record above $77 a barrel Friday.

``Markets initially priced in an expectation that this would become a broader regional conflict and interrupt Iranian supplies," said Jason Schenker, an economist at Wachovia Corp. A financial backer of Hezbollah, Iran is OPEC's number two supplier.

Schenker said markets were also responding to Energy Department data that showed US gasoline inventories above year-ago levels for the first time since late March. ``We've got some lush supplies," he said.

Light sweet crude for August delivery tumbled as low as $71.65 a barrel on the New York Mercantile Exchange, before settling at $72.66, a decline of 88 cents. Gasoline futures declined 3.72 cents to settle at $2.2298 a gallon, while heating oil futures finished 1.83 cents lower at $1.9651 a gallon.

September Brent crude futures on London's ICE Futures exchange declined 46 cents to settle at $73.90 a barrel.

In its weekly inventory report, the Energy Department said gasoline inventories grew by 1.5 million barrels last week to 214.2 million barrels, or close to 1 percent above year-ago levels.

The increase in supplies came as refineries cranked up their production, pumping out gasoline, diesel, and other fuels at 93 percent of total capacity to meet growing demand. Over the past four weeks, US gasoline demand averaged almost 9.6 million barrels per day, or 1.9 percent greater than last year.

But oil prices began to fall even before the US data was released.

``The profit-taking was initiated after [US Secretary of State] Condoleezza Rice seemed to point to the US favoring a cease-fire," said Paul J. Harris, analyst at Bank of Ireland Global Markets in Dublin.

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