WTI hovers near 5-1/2-month low on U.S. inventories, Fed stimulus

West Texas Intermediate hovered near the lowest since the end of May on expectations both a private and a government report will show U.S. crude inventories rose for an eight consecutive week last week to the highest since June. Comments by a senior Fed official that he cant rule out tapering of Feds quantitative easing program in December rattled the market. Prices however drew support on ongoing turmoil in Libya and after Iranian diplomats and their counterparts from six world powers failed to reach an agreement over the Islamic republics disputed nuclear program.

On the New York Mercantile Exchange, WTI crude for delivery in December traded at $93.40 per barrel at 8:21 GMT, up 0.38% on the day. Prices plunged to a days low of $92.92, near yesterdays 5-1/2-month low of $92.88, followed by a rebound to session high of $93.42 a barrel. The U.S. benchmark lost 2% on Tuesday, the most in more than a month, but trimmed its weekly decline to less than 1.1% on Wednesday.

Meanwhile on the ICE, Brent futures for settlement in January rose by 0.43% to $106.00 a barrel by 8:21 GMT. Prices held in daily range between $106.07 and $105.58 a barrel. The European benchmark shed little over 0.4% on Tuesday but extended its weekly advance to over 0.9% following Wednesdays rebound.

The oil market continued to be pressured by expectations the industry-funded American Petroleum Institute and the Energy Information Administration will report that U.S. crude oil stockpiles rose for an eight consecutive week last week to the highest since June. According to a weekly Bloomberg News survey of eleven analysts, crude supplies may have risen by 800 000 barrels to 386.2 million in the week ended November 8, the highest level since the seven days to June 21. Motor gasoline inventories are projected to have fallen by 900 000 barrels, a fifth consecutive weekly decline, while distillate fuel stockpiles probably dropped by 1 million barrels, the poll showed.

U.S. crude inventories have soared recently as refineries were idled for maintenance works prior to the winter season. Expectations for a pick up in refinery utilization however limited losses as investors expected supplies to be drained in the upcoming weeks.

The American Petroleum Institute will release its report on Wednesday at 21:30 GMT, while EIAs statistics will be published on Thursday due to Mondays Veterans day holiday.

Fed stimulus outlook

WTI crude was also pressured after Federal Reserve Bank of Atlanta President Dennis Lockhart said in a statement on Tuesday he wouldnt rule out a so-called tapering of Feds quantitative easing program at FOMCs December 17-18 policy meeting. However, he added that inflation remained low and would want to see it moving toward the central banks 2% target before the $85 billion in monthly purchases are reduced. He called for “continued strong stimulus” and said the central bank wants to see economic growth reach 3% or more, a faster pace than its long-term trend.

“Monetary policy overall should remain very accommodative for quite some time,” Lockhart said. “Even though the economy is growing, and were making progress on unemployment, there are real concerns about whether the recent modest pace of GDP is enough to maintain employment momentum.”

Meanwhile, Federal Reserve Bank of Minneapolis Narayana Kocherlakota shared Lockharts opinion and spoke even more strongly on the need for monetary stimulus. He said the central bank should continue with its aggressive action and not scale back the program to safeguard the economy and ensure its recovery. The Federal Reserve should do “whatever it takes” to bring the economy back to full employment quickly, he said.

“Inflation remains weak, or very low by historical standards, by the (Feds) goal of 2 percent per year, so there is no reason to be afraid of monetary stimulus,” Kocherlakota stated. “Reducing the flow of (bond) purchases in the near term would be a drag on the already slow rate of progress of the economy toward the committees goals.”

Investors are now awaiting statements by Philadelphia Fed President Charles Plosser and Fed Vice Chairwoman Janet Yellen who are due to speak on Thursday.

Ben Le Brun, a market analyst at OptionsXpress in Sydney, commented for CNBC: “Traders are just trying to second-guess what the Feds next move will be. It wouldnt surprise me to see oil prices going a little bit higher, given the falls weve seen, but confirmation of a rebound will not happen until we know what the Feds intentions are.”

OPEC output

Market sentiment was pressured after OPEC said in its monthly Oil Market Report yesterday that its output next year will remain higher than demand for its crude, even though Saudi Arabia, the groups biggest producer, cut its production in October. According to the report, estimates for demand for OPEC oil remained unchanged from a month earlier and will average 29.57 million barrels per day, trailing Octobers 29.89 million bpd output.

This comes after the International Energy Agency said yesterday the U.S. will overtake Russia as world’s top producer by 2015 and be close to energy self-sufficiency in the next twenty years amid increased output from shale formations. The upward trend however is expected to plateau after 2020 and the U.S. will lose its top ranking in the beginning of the 2030s. The role of OPEC is expected to recover by the time U.S. shale oil production begins to lose momentum in the middle of the next decade. U.S. crude production jumped to 7.896 million bpd in the week ended October 18, the highest level since 1989, EIA data showed.

Iran talks, Libya output

The oil market however continued to draw some support after Iranian diplomats and their peers from the U.S., U.K., France, Russia, China and Germany failed to reach an agreement on the nation’s disputed nuclear program in Geneva last week. However, negotiations are set to resume on November 20. U.S. Secretary of State John Kerry said he hoped for an agreement over Iran’s nuclear program within months.

Iran said on Monday it will grant U.N. inspectors “managed access” for inspections on some key points of its nuclear program as a sign it is willing to grant concessions. The International Atomic Energy Agency was permitted access to inspect Iran’s largest uranium mine and a heavy-water plant. Despite the show of good faith, investors dont expect any additional barrels of Iranian oil to return to the market any soon.

Harry Tchilinguirian, head of commodity markets at BNP Paribas, said in a note: “It does not appear to us that a breakthrough will emerge soon and that continuing lost Iranian barrels will remain a supportive factor to oil prices.”

Also fanning concern over global supply, protesters blocked the front gate of Libyas Zawiya refinery and oil port on Tuesday, demanding more rights. The African countrys gas exports to Italy were halted on Monday by demonstrators. A day earlier, an autonomy movement said it had formed a regional oil company to start selling oil.