Oil settles up - a bit

Weekly Energy Dept. data show a surprising increase in oil stocks. Fed leaves rates unchanged.

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By Julianne Pepitone, CNNMoney.com contributing writer

Oil saw a choppy session on reports from the Federal Reserve and the Energy Department. It settled slightly up from Tuesday.
Click the chart to view latest commodity prices.
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NEW YORK (CNNMoney.com) -- Oil prices settled slightly higher Wednesday after briefly spiking when the Federal Reserve said it would leave its key interest rate unchanged.

The March light crude contract was up $2.02 to $43.60 a barrel following the statement's release. Prices then returned to levels seen earlier in the session and settled up 58 cents to $42.16 a barrel.

At the conclusion of its two-day meeting, the Fed gave a bleak outlook for the U.S. economy, saying that while it expected a "gradual recovery" to begin later this year, significant risks remain.

Oil prices tiptoed the breakeven line most of the session.

EIA report: Earlier in the day, the Energy Information Administration released its weekly inventory report.

Crude stocks increased by 6.2 million barrels in the week ended Jan. 26. Analysts were looking for an increase of 3.4 million barrels of crude oil, according to a consensus estimate of industry analysts surveyed by Platts, a global energy information provider.

"This speaks volumes about the oil glut," said James Cordier, president of Liberty Trading Group. "The market will have a difficult time putting together a sustainable rally with these huge increases in oil supply."

A stronger stock market and talk of the stimulus package may have given prices a boost today, and concerns over Wednesday's report were likely already priced into the oil market, Cordier said.

Stockpiles of gasoline decreased by 100,000 barrels, while analysts were looking for an increase of 1.8 million barrels.

Distillates, used to make heating oil and diesel fuel, fell by 1 million barrels. Analysts were looking for a decrease of 1.8 million barrels.

Refineries operated at 82.5% of capacity. Analysts were looking for a 0.6 percentage point drop to 82.7%.

"It's one of those days that the market drifts," said Peter Beutel, analyst at Cameron Hanover. "No one is sticking on any one topic of conversation."

People are buying refined products, which may have pulled crude up, Beutel said. But a combination of factors led to the uneven session.

"Riptides are pulling the market at all directions," Beutel said. "Between potential OPEC cuts, refinery maintenance, low gas prices, and the general state of the economy, the market seemed to be just gliding along."

Supply and demand: Oil's supply-demand picture remains weak, with a large stock build in the United States and extremely weak demand in China, the world's second-largest energy consumer.

"They're taking huge steps to lower the volume of products produced, as we see in the gasoline stockpile," Cordier said. "But that's simply because of the decrease in refinery utilization - it's short-lived, just just smoke and mirrors."

Oil supplies in the U.S. have gone up significantly in the past several weeks. Last week, the Energy Department reported supplies of crude increased by 6.1 million barrels in the week ended Jan. 16, when analysts had been expecting an increase of only 1.9 million barrels.

Crude prices have dropped more than $100 from a record peak above $147 a barrel in July last year, sunk by plummeting demand amid the recession.

Demand is dependent on the ongoing economic uncertainty and whether the Organization of the Petroleum Exporting Countries, which produces about 40% of the world's oil, will meet its pledge to cut output by 2.2 million barrels a day this month.

Economic data: This week's U.S. economic reports have been mixed, with positive housing data tempered by devastating layoff announcements.

Sales of existing homes in December rose an unexpected 6.5% for the month, and the index of leading economic indicators from the Conference Board fell a less-than-expected 0.3%.

However, Monday and Tuesday were bleak days for the labor market as employers, including Home Depot, Caterpillar and Sprint, announced more than 80,000 job cuts.

Weather: Cold weather in the U.S. has helped prices move up from lows earlier in January of $32.70 a barrel. A cyclone off western Australia has shut down nearly half the country's oil output, but some operators said production was likely to resume Wednesday as the storm weakens.

Outlook: The March contract will be pulled down to "the high $30-something mark" in the coming weeks, Cordier said.

"When push comes to shove, if people are not using the oil, prices will go down," he said.

The U.S. and countries overseas simply have too much supply, and that problem will not soon fade, even if prices see a short-term boost, Cordier said.

"When traders buy energies (oil) because of factors like a stimulus package or a stock market rally, that doesn't make oil barrels disappear," he said. To top of page

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