Oil drops from 5-month high on concern demand slow to accelerate



NEW YORK (Bloomberg) -- Crude oil fell from a five-month high, on concern that demand isn’t rising fast enough to erase a glut.

Prices dropped for the first time in three days in New York and London. U.S. oil demand will grow 1.7% this year, compared with a 6.3% gain in production, according to forecasts from the Energy Information Administration.

Oil has rebounded about 40% from a six-year low in March as drillers in the U.S. cut the number of active rigs to the fewest since September 2010. The recovery may falter, as shale oil companies, including Chesapeake Energy Corp., lift their production outlook while others signal an increase in drilling.

“The market’s gotten a bit ahead of itself,” said Gene McGillian, a senior analyst at Tradition Energy in Stamford, Connecticut. “Demand is still not strong enough.”

West Texas Intermediate for June delivery slipped $1.99, or 3.3%, to $58.94/bbl on the New York Mercantile Exchange. Futures settled at $60.93 Wednesday, the highest since Dec. 10. Total trading volume was 5.7% below the 100-day average for the time of day.

Brent for June settlement fell $2.23, or 3.3%, to $65.54/bbl on the London-based ICE Futures Europe exchange. It ended Wednesday at $67.77, the highest close since Dec. 5. Volume was up 26% from the 100-day average. The European benchmark crude traded at a $6.60 premium to WTI.

Crude also slid as the dollar advanced from a three-month low, reducing the appeal of commodities.

Crude Supplies

Crude stockpiles in the world’s biggest oil consumer shrank by 3.88 MMbbl last week, the first drop in four months, the EIA said. Supplies remain more than 100 MMbbl above the five-year average for this time of the year.

“We had such a run up recently that some kind of pullback was to be expected,” Rob Haworth, a senior investment strategist in Seattle at U.S. Bank Wealth Management, which oversees about $126 billion of assets, said by phone. “The path of least resistance now is lower.”

Supplies of gasoline gained for a second week to 227.9 MMbbl in the week ended May 1, the EIA said. Implied demand fell by 1.5% to 8.79 MMbpd.

Gasoline futures dropped 4.63 cents, or 2.3%, to $1.9903/gal on the Nymex.

‘Bearish Market’

“Poor gasoline demand and too much global crude production, and it adds up to a bearish market,” said Tom Finlon, Jupiter, Florida-based director of Energy Analytics Group LLC. “Fundamentally the market should move lower.”

The slide in inventories was driven by higher refinery processing, “flat” crude production and reduced imports, according to Societe Generale SA. The record expansion in U.S. inventories will end this month, analysts including Michael Wittner in New York said in an e-mailed report.

Production shrank by 4,000 bpd to 9.37 MMbpd for the third drop in four weeks, according to EIA estimates. The U.S. rig count is down 57% since December, Baker Hughes Inc., an oil-services company, reported May 1.

Shale explorer EOG Resources Inc. said Tuesday that it plans to boost drilling as soon as the market stabilizes at about $65/bbl, while Carrizo Oil & Gas Inc. and Devon Energy Corp. this week raised their full-year production outlooks.

“Prices have risen enough that investment will start to trickle back and with it production,” said Stewart Glickman, an equity analyst at S&P Capital IQ in New York. “We could soon see a second surge of production growth.”


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