Oil Ends Lower After Data

Crude inventories rise by 1.1 million barrels.
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Updated from 2:59 p.m. EST

Oil prices closed down Thursday as traders focused on robust inventories and disregarded supply threats around the world.

Light, sweet crude slipped 47 cents, or 0.7%, to settle at $60.54 a barrel after the Energy Department said oil stocks rose by 1.1 million barrels last week. Analysts polled by

Platts

and

Bloomberg

had expected increases of 1.1 million barrels to 1.2 million barrels, on average.

Traders' worries that a nuclear standoff with Iran and supply cuts in Ecuador and Nigeria would drastically reduce world supplies took a backseat to the latest inventory report. Oil supplies are 9.9% above last year's level, more than enough to meet any dropoff in supplies from Nigeria.

The decline in crude prices weighed on energy stocks like

Exxon Mobil

(XOM) - Get Report

,

ConocoPhillips

(COP) - Get Report

and

BP

(BP) - Get Report

.

Exxon shares, which helped drag down the

S&P 500

and the

Dow Jones Industrial Average

, lost 43 cents, or 0.7%, to $59.83. ConocoPhillips was down 47 cents, or 0.8%, to $61.43, while BP shed 41 cents, or 0.6%, to $67.40.

Unleaded gasoline added 3 cents, or 2.6%, to $1.51 a gallon after the same report showed that inventories rose by 100,000 barrels to 225.6 million barrels. The increase was smaller than the forecast 1 million-barrel build because of lower gasoline production and a 2% increase in demand last week. Demand for gasoline likely grew because of a dip in prices last week to $2.24 a gallon for regular unleaded. Prices are at their lowest level this year.

Gasoline stocks are at their highest point since June 1999 and may mean that the market is in "contango" or when future prices for a commodity are higher than spot prices. Futures prices may be higher because refiners have to phase out MTBE by May and companies might want to get rid of gasoline with the additive before then.

Gasoline for March delivery has plunged nearly 14% this year as the market dumped contracts with MTBE. Another reason could be that gasoline supplies are being hoarded in case of any future supply problems.

"If there is anything commercial interests hate, it's uncertainty such as this, and so we may see continued volatility until this situation becomes more clear," wrote Bill O'Grady, assistant director of market analysis at AG Edwards, in a note to clients.

Many refineries are closed for the seasonal maintenance they delayed to meet demand after hurricanes shut down much of the Gulf Coast's petroleum infrastructure last year. Some refiners are still struggling to return to full operation almost six months after Hurricane Katrina made landfall. Refiners operated at 86.6% capacity, a slight uptick from the previous week, but still low for this time of year.

"This reduced domestic refining capacity is increasing our reliance on gasoline and distillate product imports," said Rakesh Shankar, an energy analyst with Economy.com in West Chester, Pa.

The Energy Department, which releases the inventory numbers every week, said distillates, which include heating oil, fell by 1.3 million barrels last week. The decline lifted the price of heating oil by 1 cent, or 0.6%, to $1.66. Distillates fell last week because of a cold snap in the Northeast, the region that uses the largest amount of heating fuel of any area in the country.

Natural gas inventories declined by 123 billion cubic feet, consistent with expectations. The futures contract, which expires on Friday, picked up 18 cents, or 2.4%, to $7.46 per million British thermal units. Supplies now stand at 2.1 trillion cubic feet, 23.7% higher than last year and 47.8% above the five-year average.

With five weeks left in the heating season, inventories will likely end at 1.7 trillion cubic feet, or 36% higher than last year, according to Energy Department estimates. A surplus would give utilities a cushion going into the summer when consumers crank up their air conditioners.

Although supplies are higher than average, crude prices are likely to remain high because of continued supply disruptions in Nigeria and Ecuador and concerns inventories will be trimmed over the Iranian nuclear standoff. The energy markets often trade on fears of expected events, even if they never come to pass.

Militants in Nigeria, who want a share of the country's oil profits, have attacked the country's petroleum infrastructure and driven down Nigeria's oil production by 455,000 barrels a day. Nigeria usually produces 2.4 million barrels every day, making it Africa's leading exporter of crude. The country's crude is particularly prized because it's low in sulfur and easy to refine.

The west African nation has become increasingly important to the U.S. as it looks to reduce its reliance on Middle Eastern oil. The U.S. expects to increase Nigerian oil imports from 15% currently to 25% over the next decade.

In Ecuador, a military-brokered truce ended violent protests that had shut down two main pipelines and a pumping station. Protestors were demanding a greater share of oil profits and infrastructure improvements for a poor region. Ecuador, which produces around 530,000 barrels a day, is Latin America's fifth-largest oil exporter.

Russian officials were set to travel to Tehran Thursday to discuss a compromise to Iran's move to restart uranium enrichment. Russian and Iranian diplomats had met in Moscow earlier this week, but failed to come up with a solution to the crisis.

China was also sending an envoy to Iran to participate in the talks to help avert a trade embargo. The International Atomic Energy Agency, the U.N.'s nuclear watchdog, referred Iran to the U.N. Security Council for its refusal to stop enriching uranium. Iran has declared that it needs nuclear power to generate more electricity for its growing population, and not, as the West asserts, as a prelude to weapons production.

Should the talks fail, the Security Council could impose economic sanctions against Iran. A trade embargo would cut world oil supplies because Iran is OPEC's second-largest producer behind Saudi Arabia.