Crude oil futures fell Wednesday as traders looked past a sharp decline in U.S. weekly crude oil inventories to focus on rising stockpiles of fuel products and sliding demand.
Analysts said the market shook off a higher-than-expected drop in crude oil inventories that normally would be a bullish factor for prices. But the 6.7-million-barrel decline reported by the Energy Information Administration was solely due to tropical storm activity that curtailed oil production in the U.S. Gulf.
With that output now restored, traders said the bigger concern is rising inventories of gasoline and distillate stocks, which include diesel and heating oil, amid continued persistent weak demand.
Gasoline stockpiles rose by 1.9 million barrels, counter to a forecast for a modest decline, as demand at the end of the peak summer driving season dropped to a four-month low. Distillate stocks rose by 1.7 million barrels, more than three times the expected level.
Light, sweet crude oil for October delivery on the New York Mercantile Exchange settled $1.30 a barrel lower at $88.91 a barrel.
The contract settled Tuesday at one-month high above $90 a barrel, but the inventory data snuffed out chances for a further rally.
U.S. refiners cut operations relative to capacity by 2% to a three-month low, as total oil demand fell 3.8% week-to-week. At 18.654 million barrels a day, demand was 2.9% below a year ago.
"The refinery reductions are reflecting poor gasoline demand," said Gene McGillian, a broker and analyst at Tradition Energy. Traders will be watching data in coming weeks to see if refiners again boost operations or take down units early for necessary seasonal maintenance work. Continued lower refinery runs could cause crude oil stocks -- already 6% above their five-year average -- to swell, adding more pressure to prices.
Reduced refinery operations, on the other hand, could tighten inventories of gasoline and distillates, which also top five-year averages.
McGillian said the conflicting factors in the market are likely to keep crude at near $85 a barrel in the near term.
"There is a battle going on between the real economic problems we are seeing in the U.S. and Europe" and the economic growth in the developing countries that is pushing global oil demand higher, he said. Demand from the developing countries will put a floor under prices, he said.
Reformulated gasoline blendstock futures for October-delivery settled at a one-month low of $2.7258 a gallon, down 1.66 cents.
Heating oil futures for October settled 0.89 cent higher, at $2.9450 a gallon.