Oil drops on euro woes, supply build

NEW YORK (CNNMoney.com) -- Oil fell Wednesday after a report showed increased oil stockpiles and instability in Europe sparked worries that energy demand and economic recovery may be slower to materialize.

What prices are doing: Crude for May delivery dropped $1.30 to settle at $80.61 a barrel.

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What's moving the market: Prices fell after the Energy Information Administration released its weekly crude inventory report showing a larger-than-expected build in supplies.

Crude inventories surged 7.3 million barrels last week, the EIA said. Analysts had forecast a 1.67 million-barrel increase, according to a survey conducted by research firm Platts.

The unexpected rise in supply was the eighth consecutive crude build reported by the EIA, according to Platts. Furthermore, imports, which jumped to their highest level since the week ending September 25, 2009, outstripped demand.

Gasoline stockpiles fell by 2.7 million barrels, a sharper drop than the 1.88 million-barrel decline expected by analysts.

Distillates, used to make heating oil and diesel, decreased by 2.4 million barrels, more than analysts' expectations of a 1.25 million-barrel drop.

Separately, a report late Tuesday from the American Petroleum Institute showed that U.S. crude inventories jumped 7.51 million barrels to an 8-month high of 351.5 million barrels last week.

Rising inventories imply lower demand, prompting worries over the strength of the economic recovery and putting downward pressure on oil prices.

Crude prices were also pressured by continued strength in the dollar against the euro. Concerns that Greece will need to tap the International Monetary Fund for a bailout, and a downgrade of Portugal's debt late Tuesday, sent investors fleeing the European currency.

The dollar was up nearly 1.2% against the euro to $1.333 on the day. A stronger dollar makes crude, which is priced in dollars, more expensive for foreign investors. This, in turn, puts downward pressure on demand and prices.

What analysts are saying: "This [decline] is a dollar-related move," said Andrew Lebow, senior vice president of energy at MF Global. "The dollar is stronger today on the Portugal news."

Many analysts say that instability in Europe could continue to weigh on crude oil markets for some time, since that turmoil will boost the dollar.

"You may see funds exit from hard assets like crude and into equities and the dollar," Lebow said.

According to Gianna Bern, president of Brookshire Advisory and Research, Inc., oil prices will "tread water" until more definitive signs of stability are apparent.

And rising gasoline prices are top of mind for many investors, who fear that an earlier than usual ramp up in prices could dampen consumer spending and stifle the economic recovery.

The national average price for a gallon of regular unleaded gasoline fell to $2.816, unchanged from the previous day's price, according to motorist group AAA. Prices are up 43% over March 2009, but lower than record levels recorded in July 2008 .

Looking ahead: The Department of Labor's report on weekly jobless claims and continuing jobless claims is due Thursday morning. Analysts are expecting a drop in both initial and continuing unemployment claims from last week.

Although positive news on the jobs front will support gains in the stock market, Lebow says that the news would have to be "really good" in order to boost oil prices.

"We've run into some overhead resistance around $83 a barrel level," said Lebow. "If the dollar continues to strengthen, the market will see revisit recent [2010] lows."