Crude Oil Below $86 as Supply Builds

A larger-than-expected build in crude inventories weakened oil prices. The May contract shed 96 cents, or 1.1%, to settle at $85.88 a barrel.
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WASHINGTON (

TheStreet

) -- A crude oil futures finished Wednesday's session nearly a dollar lower as a bigger-than-expected build in crude inventories last week triggered concerns about weak demand.

Crude oil inventory levels rose by 2 million barrels for the week ending April 2, the Energy Information Administration said this morning, which outpaced a Platts forecast calling for a 1.5 million-barrel buildup.

Futures were down ahead of the report and remained depressed in the aftermath of the weak demand data. The May delivery crude contract lost 96 cents, or 1.1%, to settle at $85.88 a barrel.

Richard Ilczyszyn, senior market strategist at Lind-Waldock, said the inventory report lacked any significant surprises and anticipated a price pullback after several days that have seen futures march higher. But he also expects the rally to continue.

"I think the wild card for us is the upside," Ilczyszyn said. "We know demand is down, so we know there's plenty of oil in the market. But I think people are afraid of committing to the short side during this part of the year."

In advance of the summer driving season, the EIA also said gasoline stockpiles fell by 2.5 million barrels, far better than the 1 million barrel drawdown analysts were looking for. But distillate fuel supplies increased by 1.1 million barrels. The Street had expected distillates would do the reverse and instead decline by 1.5 million barrels.

The May heating oil contract shed 2 cents, or 1.1%, to settle at $2.24 a gallon, while May gasoline lost 3 cents, or 1.4%, to settle at $2.32 a gallon.

Dollar strength also put a lid on commodity prices today as

sovereign debt anxiety pressured the euro. The dollar index, which compares the greenback against a cadre of currencies, rose 0.2%.

Stocks spent most of the session in negative territory but weakened further after Kansas City Fed President

Thomas Hoenig issued a strong warning that keeping interest rates low would encourage economic bubbles.

Energy was the session's worst-performing sector with shares of

Total

(TOT) - Get Report

,

Suncor Energy

(SU) - Get Report

losing more than 2% while

Marathon Oil

(MRO) - Get Report

,

Royal Dutch Shell

(RDS.A)

and

PetroChina

(PTR) - Get Report

all down by more than 1%.

Dow components

Exxon Mobil

(XOM) - Get Report

and

Chevron

(CVX) - Get Report

declined by 0.8% and 0.7%, respectively.

The NYSE Arca Oil index slid 1.7%, and the Philadelphia Oil Services Sector index dropped 1.5%.

Shares of

EOG Resources

(EOG) - Get Report

was a notable exception, gaining $6.36, or 6.5%, to $103.74 after announcing a series of crude oil finds in South Texas, North Dakota and Colorado.

"The combination of these new assets with the expansion of our existing portfolio positions EOG to become one of the largest domestic onshore lower-48 liquids producers by 2012," Mark Papa, CEO of EOG, said in a press release. "We believe the South Texas Eagle Ford horizontal crude oil play will prove to be one of the most significant United States oil discoveries in the past 40 years."

Elsewhere in the energy realm, the board for

Macarthur Coal

unanimously rejected a takeover bid from

Peabody Energy

(BTU) - Get Report

, saying the offer doesn't fully value of the firm.

The natural gas contract for May delivery shed 8 cents, or 1.9%, to settle at $4.02 per million British thermal units ahead of weekly EIA storage figures due Thursday morning.

Analysts polled by Platts are projecting storage gains of 29 to 33 billion cubic feet in the week ended April 2.

-- Written by Sung Moss and Melinda Peer in New York

.