Crude oil futures prices plummeted Wednesday, falling by nearly $3 a barrel, as traders shelved concerns about tight winter-fuel supplies, at least temporarily, and focused instead on data that showed rising U.S. oil inventories.
Analysts also said the market is anticipating an eventual reversal in what has been a steady decline in U.S. inventories of distillate fuel, which includes heating oil.
But if the sell-off was triggered by a shifting analysis of market fundamentals, it was certainly magnified by speculators rushing to offset earlier bets they had made that oil prices would move higher, brokers and analysts said.
"The market looks like it's ready to fall hard and fast," said Ed Silliere, vice president of risk management at Energy Merchant LLC in New York.
That it did. By early afternoon, crude for December delivery was down $2.82, or roughly 5 percent, to $52.35 a barrel on the New York Mercantile Exchange. The record Nymex settlement price of $55.17 was reached Friday and matched Tuesday.
Oil prices initially rose after the Energy Department reported a steep decline in U.S. inventories of distillate, the sixth straight week in which the nation's distillate supply shrank. But traders said a sharper-than-expected increase in crude supplies turned things around.
U.S. inventories of crude oil grew by 4 million barrels to 283.4 million barrels last week, the government said — an increase about twice as large as Wall Street was expecting.
The nation's inventory of distillate fuel, which includes heating oil and diesel, contracted by 2.4 million barrels to 116.6 million barrels, or 12 percent lower than a year ago.
"I'm a little surprised the market hasn't reacted a little more violently to that," said Tom Kloza, director of the Oil Price Information Service, a Lakewood, N.J., provider of industry data and analysis.
But other analysts said that was because the market was anticipating that refiners, having completed fall maintenance, are now in a position to ramp up output of heating oil ahead of the Northern Hemisphere winter.
"A lot of people believe this week could be the last real bullish number that you see for heating oil," said Andrew Lebow, senior vice president at Man Financial, a New York-based brokerage. "We probably will begin rebuilding inventories for the next five to 10 weeks and that may take the real sting out of the heating oil market, as long as the weather is not ridiculously cold in November."
"We're also seeing some pretty strong speculative liquidation," Lebow said.
Heating oil for November delivery plummeted 6.31 cents to $1.5050 per gallon on Nymex, where gasoline futures dropped 6.95 cents to $1.343 per gallon.
Tom Bentz, a trader at BNP Paribas Futures in New York, said it was not yet clear to him whether Wednesday's slide was the start of a larger trend to the downside or a one day technical correction that could be followed by moves higher, as the market has witnessed time and again throughout the year.
"From a technical standpoint, I can see a potential correction coming," Bentz said, but he does not believe market fundamentals have changed all that much.
Also on Wednesday, OPEC urged Washington to release more oil from its strategic reserve to calm the market.
Oil prices are up sharply from a year ago on the back of higher-than-expected demand, primarily from China, supply fears and limited excess production capacity. Unrest and production halts in member nations Nigeria, Saudi Arabia, Iraq and Venezuela have added to the price spike in recent months.
Crude oil price increases since mid-September have primarily been due to the slow pace of recovery in the Gulf of Mexico, where Hurricane Ivan forced rigs to close and pipelines to shut from mid-September. More than 25 million barrels of production have been lost since Ivan hit, while 103.2 billion cubic feet of natural gas output was lost.
Underlying winter fears and supply disruptions is the world's limited excess capacity — hovering about 1 percent above daily consumption of 82.4 million barrels, leaving little room to maneuver in a production outage.
Purnomo Yusgiantoro, president of the Organization of Petroleum Exporting Countries, said Wednesday the cartel has asked the United States to "use their oil reserves to help cool down the prices." He said the group will discuss the issue further but did not say whether it had received a pledge from Washington on the matter.
But Purnomo's request was unlikely to be heeded by the United States, said Kevin Norrish, an analyst at Barclays Capital in London.
Purnomo also asked OPEC members to increase production "to give a signal to the market that we aren't short of supply."