Oil eases off 14-month high but remains steady above $104

West Texas Intermediate crude rose to a fresh 14-month high of $104.74 per barrel during Asian trading as the American Petroleum Institute said in its weekly report that U.S. oil reserves dropped more than expected for a second straight week, offsetting IMFs trimmed global growth forecast from yesterday. Violent clashes between supporters of Egypts ex-president Mohamed Mursi and Egyptian military forces continued to weigh on prices.

On the New York Mercantile Exchange, WTI crude for August delivery traded at $104.39 per barrel at 7:10 GMT, easing from the previously hit 14-month high of $104.74 but still up 0.83% on the day. Days low stood at $104.07 per barrel. Light, sweet crude settled 1.3% higher yesterday and has advanced 0.8% so far this week after gaining around 10% during the preceding two.

Meanwhile on the ICE Futures Exchange, Brent oil for August delivery traded at $107.92 per barrel at 7:10 GMT, marking a slight daily gain of 0.10%. Prices held in range between $108.26 and $107.72 per barrel respectively. The European benchmark gained 0.83% on Tuesday and is up 0.13% for the week after surging around 6.6% during the last two.

Oil reserves drop

WTI crude hit a 14-month high as yesterday the industry-funded American Petroleum Institute reported U.S. Crude Oil Inventories dropped by 9 million barrels in the week ended July 9, well above analysts expectations. Gasoline stockpiles fell by 3.5 million barrels, while distillate fuel reserves gained 2.8 million, exceeding expectations. APIs report however is considered less reliable than the one the Energy Information Administration will provide at 14:30 GMT since it is based on voluntary information from operators of bulk terminals, refineries and pipelines.

According to a Bloomberg survey, EIAs report should show crude oil inventories fell by 3.1 million barrels in the week ending July 5. Gasoline stockpiles are expected to have risen by 1 million barrels and distillate fuel reserves should have gained 1 million as well. Refineries probably operated with a 0.25% increased capacity hitting the highest level of 92.4 since August.

Jonathan Barratt, the chief executive officer of Barratt’s Bulletin, said: “This time of the year, you have to expect a decrease in stockpiles. If people are confident about hitting the road and spending money, then they are confident about the economy.”

Tony Nunan, risk manager at Mitsubishi Corp. said for Reuters: “China was the big focus for a while but now it seems the U.S. is the main driver for both bullish and bearish views. Suddenly, it seems investors have caught on to (U.S. oil) as the investment of choice.”

However, analysts pointed out the favorable for oil prices drops in inventories are due to the summer driving season, leaving the weak global demand prospects intact.

“The market is too high from a fundamentals point of view. It is riding on the back of expectations of a revival in U.S. demand. But that revival we are seeing now is more seasonal, and there is no clear indication yet of a steady revival in demand”, said Barratt.

Weak economic outlook

Meanwhile, oil gains remained capped as weak global growth prospects were reinforced by the IMF. On Tuesday, the IMF trimmed its 3.3% global economic expansion forecast for 2013 down to 3.1%. The 2014 projection was also reduced, down to 3.8% from 4.0%.

Jonathan Barratt commented: “I expect crude oil imports will continue to slow because the overall economy is slowing.”

Yesterday, Chinas National Bureau of Statistics reported that annual consumer inflation rose more than expected on increased food costs and the countrys Producer Price Index (PPI) surpassed expectations and posted the worst reading since 2002. Each of the countrys final PMI readings for June and flash readings for July pointed at worse performance compared to the preceding period, while Goldman Sachs recently cut its GDP growth projection down to 7.4%.

Chinas economy further disappointed yesterday, reinforcing views of a slowdown, as a fall in both June exports and imports was reported, when both were expected to rise. The Asian countrys crude imports fell by 1.4% compared to the same month in 2012.

However, oil is still drawing support from the political tension in Egypt, which threatens to disturbed a combined 2.24 million barrels oil per day transportation through the state-controlled Suez Canal and Suez-Mediterranean Pipeline. Although recent reports showed that shipments and flow remained normal, market players are spooked and the geopolitical risk adds a premium to oil.

Yesterday, Egypt’s interim president Adly Mansour sought to dampen further escalation of conflicts by setting a timetable for parliamentary elections within seven months after amendments to the country’s constitution are approved in a referendum. Presidential elections are due later in 2014.

Investors are now looking ahead into Fed’s minutes on Wednesday and Ben Bernanke’s statement, which are expected to provide further information about the central bank’s future monetary policy. After the latest FOMC meeting, Ben Bernanke said Feds Quantitative easing program will most probably be scaled back during the second half of the year and might come to an end by mid-2014, if all the necessary signs of consistent economic recovery are provided.