Oil Prices Fall After Supply Report

Oil prices fell Wednesday as a key government report showed U.S. petroleum supplies increased last week.

NEW YORK (AP) -- Oil prices fell Wednesday as a key government report showed U.S. petroleum supplies increased last week. Energy traders meanwhile continued to watch developments in Libya, where weeks of unrest showed no signs of easing.

Benchmark West Texas Intermediate crude for April delivery lost 14 cents at $104.88 a barrel in midday trading on the New York Mercantile Exchange.

In London, Brent crude rose $2.36 to $115.42 per barrel on the ICE Futures exchange.

The report from the Energy Department's Energy Information Administration showed crude oil supplies grew by 2.5 million barrels. That's about what analysts surveyed by Platts, the energy information arm of McGraw-Hill Cos., expected.

Gasoline supplies fell by 5.5 million barrels, almost twice the amount analysts forecast. Distillates, which include diesel and heating oil, shrank by four million barrels, also twice as much as analysts estimated. America's refineries operated at 82 percent of capacity, slightly above expectations.

PFGBest analyst Phil Flynn attributed the steep decline in gasoline supplies to refiners who were getting rid of winter blends so they could switch to producing summer formulas intended to reduce smog.

With oil supplies abundant close to home, much of the focus remains on North Africa and the Middle East, and what may lie ahead for global supplies there. Anti-government unrest has shut down most of Libya's 1.6 million barrels per day of crude production. On Wednesday forces loyal to Moammar Gadhafi struck an oil pipeline and storage facility as they attacked rebels in at least two major cities.

Flynn said oil prices showed little reaction to the news because much of the risk to Libyan supplies has been priced in.

Traders are concerned that uprisings could spread to Saudi Arabia, the world's largest crude exporter and the most important member of the Organization of Petroleum Exporting Countries. Saudi Arabia has increased production to make up for a drop in Libyan exports, but that is cutting into its surplus supply. Platts reports that OPEC's crude production rose last month by 230,000 barrels per day from January levels to 29.8 million barrels per day.

"Should another country on the scale of Libya also exit the market, Saudi Arabia's spare capacities would be likely to fall to a critical level of less than two million barrels a day," analysts at Commerzbank in Frankfurt said.

Saudi Arabia controls much of the world's spare oil production capacity -- about 4.5 million barrels a day. That spare capacity is viewed as a buffer against soaring oil prices as demand picks up in the global economic recovery.

Uncertainty about the Middle East prompted Bank of America Merrill Lynch to raise its 2011 WTI oil price forecast to $101 per barrel from $87, with Brent crude expected to average $122 a barrel in the second quarter.

"Our base case assumes Libya will stay mostly offline for 6 months, limited oil infrastructure damage, no further oil supply disruptions in the region and modest global demand destruction," the analysts said in a report.

In other Nymex trading for April contracts, heating oil rose 5 cents to $3.0579 a gallon, gasoline gained 6 cents at $3.0055 a gallon and natural gas picked up 4 cents to $3.902 per 1,000 cubic feet.
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