5-21-14 3:05 PM EDT | Email Article

By Myra P. Saefong and William L. Watts, MarketWatch


SAN FRANCISCO (MarketWatch) -- Oil futures topped $104 a barrel on Wednesday to settle at their highest level in a month after a U.S. government report showed a drop in weekly crude inventories that was much bigger than the market expected.


In its first full session as a front-month contract, July crude (CLN4) rose $1.74, or 1.7%, to settle at $104.07 a barrel on the New York Mercantile Exchange. Prices were trading around $103.39 before the government supply data were released. Based on the most-active contracts, prices haven't closed at a level this high since April 21, FactSet data show.


Traders reacted with surprise to the sharp drop in U.S. crude stocks, said Matthew Parry, senior oil analyst at the International Energy Agency. Given the current, already very low level of stockpiles in the Organization for Economic Cooperation and Development countries, "the tightening situation sent prices higher."


The U.S. Energy Information Administration said early Wednesday crude stockpiles dropped 7.2 million barrels for the week ended May 16.


The decline was more than 23 times bigger than expected, as analysts polled by Platts were looking for a more modest decline of 300,000 barrels. But late Tuesday, the American Petroleum Institute reported that crude supplies fell by a larger 10.3 million barrels.


The large draw in crude oil is supported by a decline in weekly imports, said John Macaluso, research analyst at Tyche Capital Advisors. Imports of commercial crude fell about 658,000 barrels from a week earlier to stand at about 6.5 million barrels, EIA data show.


"Reports of rising violence in Libya [also] provide a source of support," he said.


"No signs of Russia's withdrawal out of the Ukrainian border presents lingering uncertainty in the market," he said. However, prices technically approaching overbought levels and trading at the higher end of the ranges "leave the market susceptible for a reversal."


Gasoline supplies rose by 1 million barrels, while distillate stockpiles climbed by 3.4 million barrels, according to the EIA. Gasoline stockpiles were expected to rise by 150,000 barrels, while distillates, which include heating oil, were seen down 250,000 barrels, according to the Platts poll.


On Nymex, June heating oil (HOM4) rose less than half a cent to $2.95 a gallon, while June gasoline (RBM4) tacked on 3 cents, or 1%, to $2.99 a gallon.


Fed minutes


U.S. oil traders also looked for hints on the outlook for energy demand in the minutes from the Federal Reserve's latest meeting, which were released shortly before the close of trading on Nymex. They apparently didn't find them as Nymex prices showed little, if any, reaction.


"There wasn't too much from the FOMC minutes to move the market," said Matt Smith, a commodity analyst at Schneider Electric. "Keeping continued stimulus to spur on the economy can be interpreted as supportive for the crude complex, but today's rally has been otherwise sponsored by a large draw to crude stocks based on the lowest imports since January 1997."


Meanwhile, prices for the European benchmark on the ICE Futures exchange, July Brent crude , gained 86 cents, or 0.8%, to $110.55 a barrel.


Analysts at Citibank boosted their 2014 forecast for Brent to $109 a barrel from $103. They also raised their 2015 forecast to $105 a barrel from $95, citing "continuing tight supply through 2014 exacerbated by escalating violence in Nigeria and Iraq as well as ongoing disruption in Libya."


Back on Nymex, prices for natural gas lost ground after tallying gains of roughly 3.1% over the past two trading sessions. The EIA will issue its weekly update on natural-gas supplies on Thursday.


June natural gas (NGM14) ended at $4.47 per million British thermal units, down 8 cents, or 1.7%.


Analysts surveyed by Platts forecast a climb of between 101 billion cubic feet and 105 billion cubic feet for the week ended May 16. That would be higher than the year-ago climb of 90 billion.


In related news Wednesday, Russia signed a deal to supply China with natural gas. Gazprom (OGZPY) CEO Alexei Miller told Russian media that the contract was worth a total of $400 billion over its 30-year life, according to The Wall Street Journal.


Richard Hastings, macros strategist at Global Hunter Securities said he doesn't see much of a trickle-over effect from the Russia-China deal at this time. "In a few years, if we really ramp up [liquefied natural-gas] exports, then we might see some sensitivity, but even then, it would depend on the countries buying our natgas."


More on MarketWatch:


'Smellin' Yellen, volume drought and Apple cheerleader Bill Miller


Mark Hulbert: Should you sell short a dull stock market?


Tiffany, Trina Solar rise, PetSmart drops

-Myra P. Saefong; 415-439-6400; AskNewswires@dowjones.com


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05-21-14 1505ET

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Morningstar - 2014/5/21 - UPDATE: Oil futures top $104 to settle at highest in a month
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