Oil edges lower

Bigger-than-expected increase in crude supply outweighs production cuts.

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By Julianne Pepitone, CNNMoney.com contributing writer

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NEW YORK (CNNMoney.com) -- Oil prices turned lower Wednesday, as a bigger-than-expected increase in the nation's crude supply offset indications of further OPEC production cuts.

U.S. light crude for March delivery settled Wednesday down 46 cents, to $40.32 a barrel.

Prices rose as high as $41.92 after a report that the Organization of Petroleum Exporting Countries production declined by about a million barrels a day last month.

But prices turned downward on the news that oil supply continued to increase.

In its weekly inventory report, the Energy Information Administration said crude stocks rose 7.2 million barrels in the week ended Jan. 30. Analysts were looking for an increase of 2.9 million barrels of crude oil, according to a consensus estimate of industry analysts surveyed by Platts, a global energy information provider.

"This report is a bearish one, and it's confirmation of a trend we've expected," said Chris Lafakis, economist at Moody's Economy.com. "Even amid production cuts, supply is far outpacing demand."

Crude oil inventories were above the upper limit of the average range for this time of year, the report said.

"If this level persists, we're going to have a glut of oil and prices will stay low," Lafakis said.

The troubled global economy has sunk demand, which in turn has caused a large buildup in crude supplies. Oil prices have plummeted from a record high of $147.27 a barrel last summer.

OPEC cuts: In response to the growing crude stockpiles, OPEC - whose members produce about 40% of the world's crude - has been pressured to put a floor under prices.

OPEC pumped an estimated 26.23 million barrels per day in January, down from 27.24 million the previous month, according to a Reuters oil company survey released Tuesday.

OPEC's recent 2.2 million barrel per day cuts, which were announced in December, come on top of a previously announced cut of 2 million barrels per day in 2008.

OPEC hasn't always had a good track record in meeting proposed production cuts, said Mike Fitzpatrick, vice president of energy at MF Global.

"But when prices are under pressure like this, OPEC tightens up," he said. "In 1998 we saw similar levels, and they cut production pretty quickly. They'll likely do that again now."

Gasoline: The EIA report also said stockpiles of gasoline rose by 300,000 barrels last week, with the total supply being in the upper half of the average range. Analysts were looking for an increase of 1.3 million barrels.

"Gas demand is weak, and this gives operators a tough time because profit margins are so low," Lafakis said. "If that continues, the U.S. could be drowning in crude oil."

The national average price for a gallon of regular unleaded gasoline increased to $1.90, up 1 cent from the previous day, according to motorist group AAA.

Prices at the pump may have been boosted by a slight uptick in demand and by refinery operation cutbacks, said Phil Flynn, senior market analyst at Alaron Trading.

"The market is going through an adjustment period that will average out over the long term," Flynn said. "As the price of crude continues to fall, it will weigh on gas prices."

Flynn expected gas prices could continue to edge higher over the next week before stabilizing and ultimately sinking.

The EIA report also noted that distillates, used to make heating oil and diesel fuel, decreased by 1.4 million barrels. Analysts were looking for a decrease of 1.2 million barrels. The total supply was above the upper limit of the average range for this time of year.

Outlook: In the short term, OPEC decisions will likely affect the oil market, but lack of demand remains the biggest concern, Lafakis said.

If production cuts don't happen, prices could sink to as low as $30 or even $25 a barrel, he said. But investors are expecting the cut, and prices should remain at current levels, he added.

Lafakis predicted an average of $65 a barrel at the end of 2009 and said he expected prices could rise to $85 by the end of 2010.

Investors will likely hedge their bets on OPEC, he said, as the organization aims to bring parity to the current oversupply and ailing demand. To top of page

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