BUSINESS

Boom in US oil output boosts supplies, knocks price down; Fed adds to slide

06/20/2012 09:40 EDT | Updated 08/20/2012 05:12 EDT
NEW YORK, N.Y. - A "build" and a "Twist" knocked oil prices to the floor on Wednesday.

In the morning, the government announced a surprise increase, or build, in U.S. oil supplies. That told investors that America has a bounty of crude and less need to import more from foreign countries. Then the U.S. Federal Reserve extended an interest-rate reduction program known as Operation Twist, but declined to take more aggressive steps to boost the economy.

Together, they sent the price of oil to a nine-month low.

Benchmark U.S. crude dropped US$2.23, or 2.7 per cent, to end the day at $81.80 per barrel on the New York Mercantile Exchange. That's the lowest level since October.

Brent crude, which is used to price much of the oil imported into the U.S., lost $3.07 to finish at $92.69 per barrel in London. That's Brent's lowest finish since December 2010.

The drop Wednesday was among the biggest in a nearly two-month swoon that has slashes 23 per cent off the price of oil.

The U.S. Energy Information Administration said oil supplies grew by 2.9 million barrels last week. That surprised analysts who had expected a decline of 600,000 barrels. Oil supplies have risen this year to the highest level since 1990, thanks to a boom in North American production.

"The U.S. is flush with oil right now," independent analyst and trader Stephen Schork said. "And if you factor in the economic mess in Europe, slower economic growth in China, and probably overproduction from the Saudis in preparation for the Iranian oil embargo, the world has a comfortable supply" of oil.

Oil prices fell further after the Federal Reserve sharply lowered its outlook for the U.S. economy at the conclusion of a two-day policy meeting. The Fed also predicted that the unemployment rate, now 8.2 per cent, probably won't fall much further this year.

In hopes of sparking borrowing and spending by consumers and businesses, the Fed said it would continue its program designed to lower long-term interest rates. Under Operation Twist, the Fed will sell $267 billion of short-term Treasurys and buy longer-term Treasurys through December.

Michael Lynch, president of Strategic Energy & Economic Research, said many investors were hoping for stronger action by the Fed. Absent that, they focused instead on its dour outlook for the economy.

Keeping interest rates low "is kind of like kissing your sister," Lynch said. "You're doing something, but it's not as big of a deal as you'd expected."

What traders wished for was another round of Fed bond purchases. The Fed on two previous occasions purchased a total of more than $2 trillion in bonds. Those bond purchases made it easier for investors to raise money, and many pumped that money into commodities like oil that were considered safe bets given rising demand from developing nations like China.

Oil's recent retreat has been good news for motorists, though.

Gasoline prices have tumbled by nearly 45 cents per gallon, on average, since the first week of April. The national average fell by a penny to $3.487 per gallon (92 cents a litre) on Wednesday, according to auto club AAA, Wright Express and Oil Price Information Service.

In other futures trading, heating oil lost 4.77 cents to end at $2.5874 per gallon while wholesale gasoline lost 5.13 cents to finish at $2.5902 per gallon. Natural gas lost 2.8 cents to end at $2.517 per 1,000 cubic feet.

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Follow Chris Kahn on Twitter at http://twitter.com/ChrisKahnAP

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