Oil dips on supply jump, soft demand
Crude futures close at the lowest level in more than 3 months after the government's weekly report shows an increase in crude supply and slumping demand for gasoline.
NEW YORK (CNNMoney.com) -- Oil ended Wednesday at the lowest price in more than three months as investors digested a surprise jump in crude stockpiles and continued weakness in demand for gasoline.
Light, sweet crude for September delivery settled 59 cents lower at $118.58 a barrel. The last time oil prices closed lower was May 2, when they finished at $116.32.
Oil prices tumbled off the day's highs above $120 a barrel immediately following the release of the government's weekly supply report. The decline in oil prices took hold as investors continued to fret over slumping demand for energy, said Peter Beutel, an oil analyst at Cameron Hanover.
"Demand really is weak," agreed Amanda Kurzendoerfer, commodities analyst at Summit Energy."It has been weak for a while, but there is this perception that it is here to say."
However, while consumers have been decreasing their energy use in the United States, there is uncertainty about how much demand in emerging markets has fallen off, according to Kurzendoerfer.
"We are starting to see signs of demand weakness in developing countries, but not enough to support this freefall," she said.
Weekly supply report. Investors look to the U.S. Energy Information Administration's weekly energy report for existing inventory levels as a gauge of energy demand.
"The report gives us an indication on both supply and demand, and a lot of the selloff in the past couple of weeks is on expectation that we will see inventories rebuild and a sluggish demand pattern continue," said Andrew Lebow, an energy analyst at MF Global in New York.
Crude oil inventories climbed by 1.7 million barrels last week. Overall, crude inventories are in the lower half of the average range for this time of year at 296.9 million barrels. Analysts had forecast a loss of 1.2 million barrels of oil, according a survey from Platts, an energy research firm.
Inventories of distillate fuel - used for heating oil and diesel - rose by 2.8 million barrels last week, slightly more than the 2.3 million barrel build in supplies that analysts were predicting. Stockpiles of distillates are near the upper boundary of the average range for this time of year.
Gasoline inventories fell by 4.4 million barrels last week, and supplies are in the middle of the average range for this time of year. The drop in gasoline stockpiles was much greater than the 1.4 million barrels that economists were expecting.
"Gas demand is still weak and inventory levels overall are still high, which is why we are still able to stay lower following that report." said Kurzendoerfer.
Demand for gas drops. Drivers are driving less than last summer. In the past four weeks, demand for gas averaged 9.4 million barrels per day, which is 2.3% lower than the same period last year, according to the government report.
For the past several weeks, demand for gasoline has remained lower than a year ago. This week's read "continues to show that consumers have cut back on driving," said Beutel.
Crude refineries processed slightly less last week, operating at 87% of their capacity.
Compared to the same time last year, however, refineries are pumping out significantly less product. According to Beutel, refineries operated at an average level of 93.6% in the same week over the past 7 years.
Refineries operated at reduced levels because the price of gasoline has dropped significantly in the past month as have crude oil prices, according to Beutel. "Gas prices should be a lot higher in terms of where crude prices are," he said.
Retail gas prices. As crude prices have come off their highs, so have gas prices at the pump. On Wednesday, prices fell for the 20th straight day, according to a survey from motorist advocacy group AAA.
Regular unleaded gas fell 0.9 cent to a nationwide average of $3.862 a gallon, which is 25 cents off the record high price of $4.114 a gallon set on July 16. Gas prices are still more than $1 higher than one year ago.
Change in market sentiment. There was an explosion overnight in a Turkish oil pipeline that carries nearly 1.2 million barrels of oil per day, according to Lebow. Oil markets did not react to the supply concern, however, which indicates a major change in market sentiment.
"A month or two ago, when the market was in its bull mode, the market would have rallied sharply on this," he said. Lebow cited the way that Tropical Storm Edouard, which passed through the Gulf of Mexico oil fields, was nearly disregarded as further evidence that the market has changed.
"We just had a tropical storm which was going right up the gut of the gas, natural gas production, and the market barely shrugged," said Lebow.
According to Lebow, the change in the oil markets is a change in supply and demand. "If you actually took a hard look at the fundamentals, the basic supply/demand fundamentals, you are seeing rising OPEC production coupled with what people like to call demand destruction," he said."U.S. demand has been very soft." 
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