WTI futures hover near five-week lows as US fuel supplies seen gaining

West Texas Intermediate crude was little changed after falling to the lowest since late November ahead of EIAs weekly report which might show US crude inventories fell for a sixth straight time last week. Expectations for a further increase in fuel supplies however pressured the market. Cold weather sweeping across central US threatening to curtail production, coupled with an escalation of tension in Libya helped lift prices from the five-week bottom. A slower-than-expected expansion in the US services sector weighed.

On the New York Mercantile Exchange, WTI crude for settlement in February rose by 0.27% to $93.69 per barrel by 8:15 GMT. Prices shifted in a daily range between $93.83 and $93.55, near yesterdays five-week low of $93.22 a barrel. The US benchmark lost 0.6% on Monday.

Meanwhile on the ICE, Brent futures for settlement in February added 0.54% to $107.31 per barrel by 8:16 GMT, holding in a range between days high and low of $107.41 and $107.01 a barrel. The European benchmark was mostly unchanged on Monday and was up nearly 0.4% on weekly basis on Tuesday. Brents premium to its US counterpart widened for a fifth day to $13.48, based on closing prices.

US crude remained under pressure amid expectations a government report may show tomorrow a further increase in US fuel inventories, signalling soft demand in the worlds top consumer. According to the median estimate of six analysts surveyed by Bloomberg, distillate fuel supplies, including diesel and heating oil, likely jumped by 2 million barrels in the seven days through January 3rd. Motor gasoline stockpiles are projected to have gained 2.5 million barrels last week after surging five times in the previous six weeks.

The Energy Information Administration is also projected to report that US crude inventories fell for a sixth consecutive week by 3.4 million barrels last week. Supplies have fallen by more than 30 million barrels over the past five seven-day periods, the biggest such draw since 1990, but analysts are contributing the decline to an intentional withdrawal to reduce year-end taxes.

Prices gained some support as freezing cold temperatures across the central US forced workers to evacuate from oil wells and interrupted drilling and fracking operations, reducing output. The unfavorable weather however also has a negative impact on the demand side. Major US producers said on Monday they have encountered only minor setbacks in their operations. Temperatures are expected to moderate in Texas and North Dakota by Wednesday.

Weighing on demand prospects, the Institute for Supply Management reported on Monday that activity in the US services sector grew at the slowest pace in six months in December. The ISM Non-Manufacturing PMI posted at 53.0 last month, the lowest since June, defying projections for a jump to 54.5 from Novembers reading of 53.9.

The sector expanded for the 48th consecutive month but at a slower rate as new orders dropped. The Non-Manufacturing Business Activity Index fell to 55.2, down from 55.5 reported in November, reflecting growth for the 53rd consecutive month, but at a slightly slower rate.

The New Orders Index contracted after 52 consecutive months of growth for the first time since July 2009. The index decreased significantly and posted at 49.4, down 7% from the previous month. The Employment Index increased by 3.3% to 55.8, indicating growth in employment for the 17th consecutive month.

Libyan tension persists

The oil market, and especially the Brent benchmark, received support after the Libyan navy intercepted an illegal attempt to load a tanker from the rebel-held Es Sider port. In an escalation of tension in the African country, the navy opened fire on Monday as a Malta-flagged vessel attempted to approach the export terminal, warning it against loading oil from units not under the control of National Oil Corp.

Prices were recently pressured after a rare success in negotiations for Libya’s Prime Minister Ali Zeidan led to the resumption of operations at Libya’s El Sharara field, which is expected to increase nationwide output to around 600 000 barrels per day. Production was at 220 000 bpd in December, just a fraction from July’s 1.4 bpd output.

However, production levels remained uncertain after a different group of protesters blocked a pipeline, again in the west, which runs to the Mellitah export terminal. Further escalations of civil unrest is projected to keep a flood under prices.

Tony Nunan, oil risk manager at Mitsubishi Corp in Tokyo, said for CNBC: “This just shows that the trouble in the Middle East and North Africa is a chronic problem thats going to take years to solve. I think Brent will stay in triple digits as long as we have this instability in the region.”

Output from the Organization of the Petroleum Exporting Countries fell to 29.53 million barrels per day in December, hitting the lowest since May 2011, dragged by supply outages in Libya, holder of Africas biggest crude reserves, and a reduction in exports from Iraq and Saudi Arabia.