Oil Ends Lower After Inventory Data

Updated from 1:52 p.m. EST

Oil prices closed down Wednesday on a combination of mild autumn weather and a bearish report on U.S. fuel supplies.

December crude closed down 10 cents to $59.75 a barrel, after rising 9 cents on Tuesday. Unleaded gasoline dropped 3.45 cents to $1.56 a gallon, while natural gas futures lost 26 cents to $11.60 per million British thermal units. Heating oil dropped 2.21 cents to $1.78 per gallon.

"Crude stocks have been building," said Mary Novak, managing director, energy services at Global Insight. "The weather's mild, the economy's robust, we've been importing a lot more products, so the pressure on oil [supplies] is relieved daily."

According to the Energy Department, crude inventories rose by 2.7 million barrels last week, about 700,000 more than expected. Gasoline inventories added 1 million barrels, putting them at the lower half of the average range. Distillate fuel inventories dropped by 200,000 barrels and remain just above the lower end of the average range for this time of year.

At 319.1 million barrels, the agency said, crude inventories remain well above the upper end of the average range for this time of year.

"This is bearish," said Tim Evans, senior energy analyst at IFR Markets. "It's bearish for energy prices and it's potentially bearish from a larger economic point of view. We may be more efficient than we were in 1980, but it still takes energy to keep the economy going, so a drop in energy demand means, in effect, less production."

Novak said natural gas prices are down as well, partially because hurricane activity in the Gulf of Mexico has shut down a number of petrochemical facilities. Mild weather is also a factor, she said.

The recovery of storm-battered refineries in the Gulf of Mexico continues. The U.S. Minerals Management Service said Wednesday's shut-in oil production was 957,978 barrels of oil per day, equivalent to 63.86% of the gulf's daily oil production. Shut-in gas production was 5.043 billion cubic feet per day, equivalent to 50.43% of the gulf's daily gas production.

In company news, Reuters reported that oilfield services group Halliburton's(HAL) planned split-off of KBR, its engineering and construction group, is likely take place through an initial public offering. Speaking at the Merrill Lynch Energy Conference, chief financial officer Christopher Gaut said an IPO is "the most attractive option at this point."

Friedman Billings upgraded Apache(APA) from market perform to market outperform and Deutsche Securities upgraded Marathon Oil(MRO) from hold to buy.

Transocean(RIG) said that Anadarko Petroleum(APC) has awarded the company three-year contracts valued at about $985 million for two of Transocean's drill ships. The work is expected to commence in June 2007.

Devon Energy(DVN), the largest U.S.-based independent oil and gas producer, earned $744 million, or $1.63 a share, in the third quarter, up 44% from a year ago. Excluding special items, Devon earned $1.87 a share, beating the expectations of analysts polled by Thompson Financial who were calling for earnings of $1.80 a share.

Shares rose for some of the other big energy market players. ConocoPhillips(COP) was up 61 cents to $66.75. Chevron(CVX) was up 77 cents to $58.41. ExxonMobil(XOM) was up 93 cents to $57.33. Burlington Resources(BR) was up $1.16 to $73.40.

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