By Jerry A. DiColo Of DOW JONES NEWSWIRES
NEW YORK (Dow Jones)--Crude futures dropped below $74 Wednesday, hitting five-week lows as equities fell and data from an industry trade group showed large builds in already high U.S. oil inventories.
Light, sweet crude for September delivery recently traded $1.61, or 2.1%, lower at $74.16 a barrel on the New York Mercantile Exchange. Brent crude on the ICE futures exchange traded $1.29 lower at $75.64 a barrel.
Late Tuesday, the American Petroleum Institute, an industry trade group, said oil inventories rose by 5.8 million barrels last week, while stocks gasoline and distillates, which include heating oil and diesel fuel, rose by around 2 million barrels each.
The unexpected rise in inventories combined with falling equities Wednesday morning to push crude to the lowest level since July 7. The Dow Jones Industrial Average was recently down 48 points to 10357.
Growing stockpiles suggest that demand for oil and oil products is having trouble keeping up with supply, a worrying prospect for a market already flush with crude. Stockpiles at the Cushing, Okla., delivery point for Nymex benchmark crude are inching closer to record levels set in May. And inventories of gasoline remain above five-year averages amid the important U.S. summer driving season.
The Department of Energy is set to report its own statistics on inventories at 10:30 a.m. EDT Wednesday. These more influential data are expected to show a 1.3-million-barrel decline in crude stocks, according to a Dow Jones Newswires survey of analysts. Gasoline stocks are seen falling by 500,000 barrels, while distillate inventories are expected to grow by 1.2 million barrels.
Cameron Hanover called the API numbers, "unexpected and surprising, not to mention bearish."
"The big question for Wednesday is whether the DOE report will in any way mirror the API numbers," the firm said, in a client note.
High inventories have helped to keep oil prices in a narrow range for several months, combining with mixed economic data that has traders concerned about the slowing economic recovery. After trading above $82 a barrel last week, crude has retreated back between $70 and $80, pulled down by a faltering equities market.
Equities have been used as a proxy for future economic growth for several months, leading the oil market as traders try to gauge the prospects for future demand. But the API data has swung attention back to oil market fundamentals of supply and demand, with market watchers awaiting the report from the energy department's Energy Information Administration.
"The question for today will be then, will the precarious equilibrium the market has staked out near $75 hold? While the EIA report later this morning may contain the seeds of disappointment, it will need to post a considerable rise in stocks to push prices significantly below that mark," said Mike Fitzpatrick, an analyst at MF Global, in a client note.
Front-month September reformulated gasoline blendstock, or RBOB, recently traded 3.61 cents, or 1.8%, lower at $1.9171 a gallon. September heating oil recently traded 3.05 cents, or 1.5%, lower at $1.9954 a gallon.
