Did you ever have one of those nights? You know, when things start one way and end another? Oil traders are thinking that now.

NYMEX crude oil initially traded higher on short-covering in the overnight market, then slumped in the early morning hours ahead of the floor session opening and the release of the weekly petroleum inventory report. Selling was centered in the nearby March contract, indicating renewed concerns about inventory buildups.

Crude prices were buoyed Wednesday when Saudi Arabia stepped up as OPEC's swing producer, cutting back its production below previous commitment levels. The action seemed to have put a floor on the NYMEX March bid at the $35.50-$36.50 level.

The current inventory build, however, may precipitate a challenge to those bids. When the U.S. Energy Department released its report this morning, analysts' hopes for a moderation in supply were blown out of the water.

Crude oil stocks had been forecast to rise 400,000 barrels, but instead ballooned by 6.1 million. Despite an expectation that refinery operations would increase, runs slipped nearly 2%, according to Energy Department figures. Refineries utilized just 83.3% of their capacity rather than the 85.2% level forecast.

Gasoline inventories also shot up dramatically. Oil patch insiders guessed at a 1.8-million-barrel build, but were deluged by a 6.5-million-barrel addition.

An anticipated 1.3-million-barrel drawdown in distillate fuels also failed to materialize. Fuel stocks - including diesel and heating oil - actually rose by 800,000 barrels.

Trader reactions to the inventory news was immediate and bearish across the board. Spot-month unleaded gasoline futures lost two cents a gallon, or 6.9%, nearby crude futures slipped $1.25 a barrel, or 6.2% and heating oil slipped nearly two pennies a gallon, or 3.5%.

A steep sell-off in input costs is likely to reverse Wednesday's market action that cut deeply into refinery margins. Yesterday's nearly $5-a-barrel rise in crude was accompanied by only modest upticks in distillate and gasoline prices. For the week, crude jumped 6.3%, unleaded gasoline (RBOB) returns held steady and the heating oil (HO) crack deteriorated 5.6%.

Even with yesterday's upside reaction, oil's technicals remained weak. Overhead resistance sits at $45.25, basis the March NYMEX contract. Bears will be looking to take out support at the $38.50 level. 

Source: Hardassestinvestor.com (written by Brad Zigler)