Investors sell after report shows unexpected increase in crude stockpiles. Attention to focus on Fed rate decision.
NEW YORK (CNNMoney.com) -- Oil prices fell $3 a barrel Wednesday after a government report showed an unexpected buildup in crude supplies in the latest week.
U.S. crude for August delivery tumbled $3.11 to $133.89a barrel on the New York Mercantile Exchange. It was down as low as $131.95, or $5.05 below Tuesday's settlement, but bounced back a bit ahead of the Federal Reserve's decision on interest rates.
Oil had been down about $1.30 before the report's release.
The Energy Information Administration's weekly petroleum report showed that crude supplies rose by 800,000 barrels during the week ended June 20. Economists had expected supplies to fall by 1.7 million barrels last week, according to Platts information service.
The EIA reported that refineries were operating at 88.6% of capacity, down slightly from last week.
Stores of distillates, used to make heating oil, rose by 2.8 million barrels, while motor gasoline stocks fell by 100,000 barrels.
Gas at the pump. The oil price decline came as the nationwide price of gasoline at the pump fell for its third day in a row, to an average of $4.067 from $4.069 a day earlier, according to a daily survey from motorist advocacy group AAA.
The price of regular gas hit a record high of $4.08 a gallon on June 16.
The price of diesel fuel, which is used by most trucks and commercial vehicles, rose 0.1 cent to $4.771 a gallon.
Oil within range. Oil has traded fairly steadily in recent days, despite the threat of supply disruptions in Nigeria and, a disappointing production increase announced by Saudi Arabia.
Recent headlines "failed to garner a consensus in one direction or the other," said Stephen Schork, publisher of The Schork Report, an oil trading newsletter.
Wednesday's drop, though large, is not significant, said Schork. "Given the volatility over the past month, a lot of this can be attributed to noise," he said.
Oil continues to trade within a $4 plus-or-minus range. However, if Wednesday's decline exceeds $4.50, prices could turn consistently lower, according to Schork.
Supply concerns. On Monday, Chevron Corp. (CVX, Fortune 500) said workers belonging to Pengassan, a white-collar union in Nigeria, had gone on strike.
And on Tuesday, just days after Saudi Arabia announced a lower-than-desired output boost, Chakib Khelil, president of the Organization of Petroleum Exporting Countries, blamed high oil prices on U.S. pressure against Iran and the weaker dollar, saying there was no need to raise supply.
Saudi Arabia announced over the weekend that it would build up its infrastructure to boost output to 9.7 million barrels a day, the highest levels since 1981.
Congress. Well-known oil researcher Daniel Yergin testified on Capitol Hill before the Joint Economic Committee as part of its ongoing inquiry into the possibility that prices are being driven up by speculators.
Yergin said speculative trading does play a role in higher prices, but so do the credit crisis and the weakened dollar.
Yergin's testimony likely had no effect on the markets Wednesday, according to Mark Waggoner, president of Excel Futures.
"This is an ongoing thing... I think the prices of oil are going to back off about Aug. 1 anyway," he said.
He also cautioned that direct government involvement in U.S. oil trading is practiced could simply drive traders to other markets such as Dubai.
"I think they should make people accountable, but to actually intervene - raising margins - bad idea," he said.
The Fed effect. Investors meanwhile looked ahead to the Federal Reserve's decision on interest rates, said Peter Beutel, oil analyst with Cameron Hanover.
The Fed is largely expected to hold a key lending rate steady when it releases its statement at 2:15 p.m. ET on Wednesday. Traders will be watching for hints about future interest rate policy.
But some economists expect the Fed will hint at rate hikes down the road in order to combat inflation. Higher rates generally support the dollar, which in turn, can affect the price of oil, which is traded in U.S. dollars.
ECB challenge. Investors may also be jittery about a possible rate increase from the European Central Bank, which controls the strength of the 15-nation euro, according to Beutel.
On June 5, ECB president Jean-Claude Trichet said the bank may raise its interest rate by a quarter point to combat inflation. A European rate increase is the equivalent of a Federal Reserve rate decrease, said Beutel.
"If the Fed doesn't do anything, then there's a very good chance that we'll shift focus to what the ECB will do next," said Beutel.
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