Oil Prices Pare Gains on Soft Report

NEW YORK ( TheStreet) -- Although oil prices gained Wednesday on a spate of bullish China demand news and expectations of more "easy money" to come, the advance was pared down a bit by the market's close on the bearish aspects of a weekly inventory report.

"There were bullish aspects of the Energy Information Administration report, but the overall picture was not that supportive, and the market gave back some of its gains by the close," said Citi Futures Perspective energy analyst Tim Evans.

West Texas Intermediate light sweet crude oil for August delivery ended the trading session at $98.05, up 62 cents, while the September Brent crude oil contract rose 91 cents to $117.85. The WTI contract hit an intraday high above $99 and Brent futures hit a high of $118.72 in the intraday.

The dollar was falling 1% to $75.26 against a basket of major currencies.

The primary drivers of the rallies were Federal Reserve Ben Bernanke's mid-morning comments about the potential for another round of quantitative easing, or QE3, which would send more so-called "easy money" into the markets and trigger outflows from safe-haven assets such as Treasurys -- that should in turn lead to riskier bets on commodities; and better-than-expected second-quarter gross domestic product and June industrial and retail sales readings out of China, the top energy consumer.

"This gives them more leeway for tackling inflation through raising rates going forward," said Summit Energy analyst Matt Smith.

"If you were long oil futures Bernanke had magical words that sent oil and most commodities higher today," commented Tom Kloza, chief oil analyst at the Oil Price Information Service.

"But it's probably bad news for consumers because it does put more upward pressure on the week-to-week purchasing needs of fuel."

Oil prices also popped thanks to the more supportive than expected weekly petroleum inventory data from the Energy Information Administration (EIA). While the American Petroleum Institute had earlier reported a surprise crude oil build, the EIA reported a bigger-than-expected crude oil draw.

"The magnitude of the API crude build released on Tuesday head faked the market into expecting at least a build of some kind, and when this wasn't the case, prices rallied -- despite the soft underbelly to the numbers," said Smith.

Analysts attribute the discrepancy to the limited and voluntary contributions from various elements of the supply chain to the API surveys vs. the mandatory contributions to the EIA surveys.

The API surveys "tend to be skewed toward the large integrated companies like the Exxons, ConocoPhillips', Shells and BPs, said Kloza. It's been representing "upstream interest more than downstream and trading interests."

By the end of the trading session, the softer underbelly of the EIA report began to regain some attention as the initial excitement over Bernanke's comments, the China data and the more bullish aspects of the EIA data subsided.

Evans noted that although the 3.1 million barrels decline in U.S. commercial crude stocks was more than expected and the 800,000 barrels decline in gasoline stocks was supportive, total petroleum inventories actually rose by 4.3 million barrels and demand was soft.

Separately, the International Energy Agency said that oil demand should continue to grow in the months ahead and that it may release more crude oil into the market at its meeting next week.

Energy stocks ended in positive territory. Suncor Energy ( SU) rose 1.1% to close at $39.68, Imperial Oil ( IMO) added 2.1% at $46.47, Exxon ( XOM) increased 0.7% to $82.48, BP ( BP) gained 0.7% to $43.74, Royal Dutch Shell ( RDS.A) advanced 1% to $71.14, Triangle Petroleum Corporation ( TPLM) rose 0.7% to $6.79 and Kodiak Oil & Gas ( KOG) increased 1.9% to $6.30.

-- Written by Andrea Tse in New York.

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