Oil fell to its lowest level this year on Wednesday, dipping
below $80 a barrel after an industry report showed rising U.S. distillate
inventories, despite the severe northern hemisphere winter.
The American Petroleum Institute (API) said in its weekly
report late on Tuesday distillate stocks -- which include heating oil and
diesel -- rose by 3.6 million barrels last week. Expectations had been for a
1.8 million barrel fall.
Prices were also pressured after China surprised world
markets by raising banks' cash reserve requirements, the latest step toward
tightening monetary policy, which some traders see potentially dampening rising
energy demand.
U.S. crude for February delivery fell as much as 1.16 a
barrel to $79.63, matching the lowest level on the first trading day of 2010. Prices
pared losses to trade down 89 cents at $79.90 a barrel by 1133 GMT.
Prices have fallen by more than $4 since hitting a 15-month
high near $84 on Monday.
London Brent crude for February, which expires on Thursday,
fell 85 cents to trade at $78.45 a barrel.
"The market is trading in the $75-$85 range, and if we
are getting warmer weather, higher inventories and Chinese monetary policy is
changing, then we should now try the lower side of that range," said
Keichi Sano, general manager of research at SCM Securities in Tokyo.
China, the world's second largest oil consumer, raised the
proportion of deposits that banks must hold in reserve by 0.5 percentage point
in a move to keep a lid on inflation.
Concerns that Chinese tightening could moderate the global
economic recovery unnerved financial markets, denting stocks, higher-yielding
currencies and commodities.
"The Chinese economy is an extraordinary buyer of
commodities and energy, so people are very concerned about its growth
pace," Sano said.
HIGHER INVENTORIES
On top of higher U.S. distillate inventories, crude and
gasoline stockpiles in the world's largest energy consumer also rose last week,
the API said.
Gasoline inventories soared by 6.8 million barrels, far
surpassing expectations for a 1.2 million barrel build. Crude stocks rose by
1.2 million barrels, matching analysts predictions.
"We cannot recall when the aggregated inventories rose
11.6 million barrels before," said Dennis Gartman, a financial markets
commentator. "The market is clearly concerned and confused."
Stocks of crude and oil products have bulged in the United
States over the past 18-months as the economic crisis has cut the demand for
energy.
Very cold weather over the last two weeks was expected to
have helped to draw down inflated inventories. Warmer weather across the
central and eastern United States is expected to arrive in the next few days,
DTN Meteorlogic said, reducing heating demand.
Government inventory data from the Energy Information
Administration (EIA) will be closely watched when it is published at 1530 GMT
to see if it confirms the API numbers.