Oil dips as U.S. distillate build offsets crude draw

By Barani Krishnan

NEW YORK (Reuters) - Oil prices fell for a fourth day in a row on Wednesday after the market ignored an unexpected drawdown in U.S. crude stockpiles to focus on a build in distillates, including diesel, that came in twice as large than expected.

A weaker dollar <.DXY>, however, limited oil's downside, making commodities denominated in the greenback more affordable to holders of the euro and other currencies.

Brent crude settled down 15 cents at $40.11 a barrel, after hitting a near seven-year low at $39.57. The benchmark has lost $3.73, or 8.5 percent, since Thursday, after an OPEC meeting on Friday virtually abandoned price support measures for oil.

 

U.S. West Texas Intermediate (WTI) crude finished the session down 35 cents at $37.16.

Brent and WTI rose more than $1 right after the Energy Information Administration (EIA) reported the first U.S. crude drawdown following 10 straight weeks of builds.

The drop of 3.6 million barrels last week cited by the EIA contrasted with a 300,000-barrel crude build forecast in a Reuters poll.

But the EIA also released bearish data showing inventories of distillates soared 5 million barrels, double what had been forecast and the sharpest rise since January. Demand for distillates also fell to their lowest level seasonally since 1998.

Ultra low sulphur diesel , also known as heating oil, settled down 1.5 percent.

Some commentators were not too impressed with the crude drawdown, saying declines were typical this time of year when refiners used up crude they had on hand before the end of the U.S. tax year.

"Much of the draw may be the result of tax-related inventory positioning by Texas and Louisiana refiners," said David Thompson, executive vice-president at Powerhouse, an energy-specialized commodities broker in Washington.

"Therefore the draw does not represent either a drop in production or an increase in demand," Thompson said.

PIRA Energy, a New York-based global oil consultancy, said it expected crude prices to be under further pressure as onshore oil storage was likely to run out by the first quarter.

"Brent crude prices will continue to struggle due to a large global commercial oil stock surplus, which PIRA estimates will total 500 million barrels above normal levels by end-2015," it said.

The spread between Brent's prompt and second-months , however, narrowed on Wednesday - a sign that some dealers anticipated tighter supply next month even as they expected a "lower for longer" price regime.

(Additional reporting by Simon Falush in London; Editing by Marguerita Choy)