The Energy Information Administration’s data on Wednesday showed a 4.2 million bbl build for U.S. crude inventories last week, with implied demand for products sluggish.

The EIA data prompted profit taking after oil prices rallied earlier following data showing the purchasing managers’ index for manufacturing expanding in the United States, Germany and China.

U.S. manufacturing grew in January at the fastest pace in seven months as exports rose, the Institute for Supply Management said Wednesday, while the Commerce Department said construction spending rose 1.5% in December, the fifth straight monthly gain.

Despite an upbeat outlook for global factory activity, oil traders remain cautious ahead of testimony before a Congressional panel later today by Federal Reserve Chairman Ben Bernanke.

The Fed chief last week prompted a broader market rally after signaling that additional quantitative easing was in the cards as a full economic recovery could take at least three more years.

Also in the background are risks to oil supply from Africa and Iran that could support the upside for oil prices.

U.S. lawmakers are considering more sanctions targeting Iran’s state oil company as well as top Iranian leaders. These U.S. measures would come on top of an oil embargo by the European Union agreed last week that will take effect in July.

In Africa, an ongoing dispute over transit fees between Sudan and South Sudan led to the shut-in of 350,000 bpd of crude while Nigeria slipped deeper into turmoil, which added to supply fears, after security forces arrested the leader of a militant Islamist group.

The optimism that buoyed oil and equities markets this morning came after 25 of the 27 EU countries agreed to a new treaty that would ensure closer supervision of their budgets in an effort to prevent a debt crisis in the future. Britain and the Czech Republic didn’t join the compact.

Meantime, Greek Prime Minister Lucas Papademos raised hopes that a deal would be reached this week to avoid a potentially chaotic debt default.

Greece is negotiating with its bondholders over debt restructuring.

Success of the talks is crucial because Athens expects to get a new bailout fund. As a result, the euro rose against the dollar, which in turn boosted oil prices.

The oil upside was also underpinned by lingering worries over risks to supply, with tension between Iran and the West escalating as the United States steps up pressure on Tehran to halt its nuclear program. U.S.

lawmakers were considering additional sanctions on top of an EU embargo on Iranian oil.

March Brent on ICE Futures was the most actively traded contract, with high volatility reportedly caused by computer-driven trading. A surge in volume had occurred as the Brent market went through a key buying level identified by one automated system.

March Brent futures briefly jumped to a two-week spot high of $113.90 bbl while March West Texas Intermediate crude futures on the NYMEX posted a three-session high on the continuation chart at $100.69 bbl, with the Brent premium over WTI now at $12.17 bbl. NYMEX February heating oil futures soared to a two-week spot high of $3.1040 while February RBOB futures stayed within Monday’s price range.

Also, a potential strike by U.S. oil refinery workers this week and the prospects of cold weather next week were supported the oil rally, said analyst Thomas Finlon at Energy Analytics Group in Jupiter, Florida.

Later today, oil traders will turn their attention to weekly oil supply data, with some analysts expecting to see a build for crude stocks and draws for products supply.

CRANBURY, N.J. (DTN)
– New York Mercantile Exchange nearby delivery oil futures were higher
overnight, with the heating oil contract posting a better than one-week high
while crude held within Thursday’s trade range.

February RBOB futures posted a fresh 3-1/2 month spot
high at $2.8654 gallon.

Oil futures are
extending gains triggered by Wednesday’s announcement by the Federal Reserve
that they would maintain the federal fund rate near zero through the end of
2014, beyond December’s guidance that it would keep the ultra-low rate through
mid-2013, and six months longer than the market expected. The Fed also laid the
groundwork for a third round of quantitative easing, which refers to active
market participation by the central bank in federal instruments such as bonds.

The Fed’s action stirred bullish sentiment
for U.S. economic growth, with an expanding economy using more energy.
Additionally, a weaker dollar has an inflationary impact on oil prices, while
near-zero interest rates drive investment dollars into equities and
commodities.

This morning,
the U.S. dollar was holding to an inside trade day in spot index trading,
edging off Thursday’s seven-week low. The S&P 500 were lower in futures
trading after an impressive move higher in January, reaching a six-month high
midweek.

Economic data
sets have supported a view that the U.S. economy is on the mend nearly three
years after the end of the Great Recession, although the recovery is uneven.
Housing data shows a sluggish and bumpy recovery, while the U.S. unemployment
rate was at 8.5% in December.

The Bureau of
Economic Analysis will release its advanced estimate for fourth quarter 2011
U.S. Gross Domestic Product at 8:30 AM ET.

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The Federal
Reserve said they would keep the federal funds rate between zero and 0.25%
through the end of 2014. Previously, the Fed announced it would keep the
ultra-low interest rate through the middle of 2013, with many market followers
anticipating the possibility of extending that policy through the middle of
2014. The longer duration was a surprise to many, immediately weakening the
U.S. dollar in spot index trading while rallying NYMEX crude and RBOB futures.
The S&P 500 surged to a fresh six-month high on the announcement.

The low interest
rate, which began in late 2008 to combat the credit crisis, is aimed at
spurring economic activity, with the latest move targeting high unemployment.
The Fed believes the jobless rate will remain high for an extended period of
time, with the central bank looking to promote higher job growth with low
borrowing rates.

However, the low
interest rate has an inflationary impact upon commodities such as oil, while
investors will also look to stave off dollar depreciation through investments
in commodities and equities, as recent history shows.

Also bullish for
equities and commodities were indications by the Fed that they might again buy
bonds to spur economic activity, which is referred to as quantitative easing.
Previous QE efforts have spurred commodities and equities higher, although the
policy has many critics.

The U.S. dollar
was lower in spot index trading this morning while the S&P 500 was moving
higher in futures trading. NYMEX oil and the dollar typically move in opposing
directions, while the crude contract has tracked closely with the S&P 500.

Overnight, March
crude futures posted a one-week spot high at $101.00 bbl, with the February
heating oil contract also registering a one-week high, reaching $3.0632 gallon.
February RBOB futures matched Wednesday’s

$2.8597 gallon better than three-month spot high in
overnight trading.

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The American
Petroleum Institute showed a huge build in crude stocks for the week-ended
Jan.20, up 7.331 million bbl, and an unexpected 573,000 bbl decline in gasoline
supply. Distillate inventory levels were drawn down by a larger-than-expected
2.464 million bbl last week. The refinery run rate eased 1.2% to 81.9%,
supporting product values while pressuring crude.

The Energy
Information Administration will release its data set for last week at 10:30 AM
ET.

Brent crude
futures were under pressure from news on Tuesday that Petroplus was insolvent
and would file for bankruptcy. The company is the largest independent refiner
and wholesaler in Europe, operating five refineries with a crude throughput
capacity of 667,000 bpd. The refiner had already shut three of those refineries
earlier this month due to a lack of operating capital, and will now shut the
other two.

While pressuring
crude futures, the news underpinned support for RBOB and heating oil futures on
the viewpoint that U.S. exports would be drawn to Europe to meet an expected
supply shortfall. Typically, the United States would ship distillates to Europe
while importing gasoline from across the Atlantic.

Market players
will be alert for signals of some form of monetary easing or other fiscal
stimulus from the Federal Reserve during its chairman’s news conference this
afternoon. This is the second day of the Federal Open Market Committee meeting,
with Ben Bernanke set to end the event with a news conference. No change is
expected in overnight bank lending interest rates, which are stuck near zero,
since the central bank has already indicated its intention to hold the rate
unchanged through 2013. Past stimulus efforts by the central bank have had the
effect of weakening the U.S. dollar while supporting higher crude prices.

The U.S. dollar
and crude have an inverse relationship. The greenback was holding near a
two-day high in spot index trading this morning.

The euro
softened and the U.S. dollar strengthened, with the greenback typically moving
in an opposing direction to NYMEX oil futures. The S&P 500 was marginally
higher in futures trading. NYMEX crude oil has tracked the direction of the
S&P 500, which is hovering at a six-month high.

Meanwhile,
markets are closed in China, the world’s second largest consumer of oil, for
the week amid the Chinese New Year—the Year of the Dragon.

Days of talks
between Greek officials and private creditors, which include European banks and
hedge funds, have reportedly reached an impasse.

Greece is looking to erase 100 billion euros of its 360
billion euros of debt through the negotiations, restructuring short-term debt
with longer-term coupons and lower interest rates.

The stalled
negotiations are cause for worry. Athens needs to satisfy officials with the
European Central Bank that they are making headway on their debt restructuring
efforts in order to receive the next bailout installment. This revenue is
needed for Greece to make its next debt payment of 14.4 billion euros or $18.5
billion, which is due on March 20.

Failure to reach
a “consensual restructuring” agreement and to make this payment, and
those due in the futures could trigger a chaotic default that is seen having a
domino effect throughout the EU and beyond. Such an event, analysts say, would
sink the EU into recession. Oil demand declines during recessions.

Tehran warned of
negative consequences should the EU move ahead with its agreement to ban
Iranian oil beginning July 1, with the EU measure meant to dissuade the Persian
nation from pursuing nuclear weapons. Iran, a member of the Organization of the
Petroleum Exporting Countries and third largest exporter of crude oil in 2010
according to the Energy Information Administration, again warned that it would
shut traffic in the Strait of Hormuz.

The strait is a
strategic shipping channel in which nearly 17 million bpd of oil passed through
in 2011, according to the EIA. The United States warned Iran that it would not
tolerate such a disruption of international trade, with a U.S. aircraft carrier
passing through the Hormuz Strait over the weekend.

Meanwhile, U.S.
oil fundamentals are weak, with the EIA expected to report Wednesday that
supply builds for crude oil and gasoline occurred last week. Gasoline demand
fell to its lowest rate since September 2001 earlier this month.

The American
Petroleum Institute will issue its weekly data set at 4:30 PM ET, with the
EIA’s report scheduled for release 10:30 AM ET Wednesday.

Tehran’s pursuit
of nuclear weapons have triggered action by western nations, with the
International Atomic Energy Agency late last year saying that Iran was
progressing in its efforts to make and deliver a nuclear weapon. Tehran denies
the allegations, saying they’re nuclear activities are for civilian purposes.

The EU agreement
was expected, with the July 1 timeline meant to give time to EU countries
currently importing Iranian oil to find alternative sources. Financially
troubled Greece was reportedly balking over the ban last week, fearing
increased costs. Reports indicate that some assistance might be provided to EU
countries detrimentally impacted by the Iranian oil ban.

The EU measures
also include a freeze on Iranian central bank assets, where payments for a
majority of Iran’s oil deals are processed. The United States, which already
bans Iranian oil imports, late last year targeted Iran’s central bank.

Tehran had
previously said it would retaliate to a ban on its oil by closing the Hormuz
Strait, a critical shipping lane for crude where an estimated 17.0 million bpd
of oil deliveries passed through in 2011. The U.S. promised to keep the strait
open. A U.S. aircraft carrier just passed through the strait.

The upside was
capped on concern that Greece will be able to reach an agreement with private
creditors over reducing its debt load, looking to wipe out about 100 billion
euros of its $360 billion euro debt load. The talks have dragged on for days
and throughout the weekend without striking a deal. Greece needs to satisfy
officials with the European rescue fund in order to receive its next bailout
installment ahead of a March 20 due date on its debt. The payment due is $14.4
billion euros or $18.5 billion.

Failure to reach accord with lenders and bailout
officials could trigger a chaotic default that is seen harming many other
European countries.

The Commodity
Futures Trading Commission reported late Friday that noncommercial market
players increased their net-long position in NYMEX oil futures through the
week-ended Jan. 17. The funds moved to a better than two-month high net-long
position in crude futures, a two-month net-long high in heating oil futures and
a nearly one-year high net-long stance for RBOB futures.

The growing
net-long position increases the risk for long liquidation selling, with the
March crude futures contract sliding to a one-month spot low of $97.40 bbl
overnight. The news on the EU ban reversed the decline.
Forecasted heating degree days for the week through Saturday (1/28)
continue to trail both year ago and seasonal averages, according to data
released this morning by the National Oceanic and Atmospheric Administration,
with HDDs for the New England and Mid-Atlantic states this week projected at
more than 25% below normal. For the season through Saturday (1/21), HDD
accumulations have trailed seasonal averages by 17%, limiting heating demand

   Greek officials are negotiating for better terms with its creditors, and need to make progress in order to receive another round of aid in front of a fast approaching due date on some of its debt. Failure to strike a deal potentially reignites concern over the euro zone debt crisis that many now believe have been pushed deeper into the future.

   Such an event would translate into lower oil demand, among other issues.

   As a result too, the U.S. dollar strengthened in early spot index trading while the euro weakened.

   The dollar steadied itself at a three-week low this morning after weakening each day this week. The dollar, in index trading, had surged to a one-year, four-month high prior Friday (1/13), coming alongside news Standard and Poor’s would downgrade the credit rating of nine European Union nations, including France, Spain and Italy, over their debt loads and insufficient policies to address that debt. Conversely, the euro has rallied this week from a better than one-year, four-month low plumbed Jan.

13.

   Typically, NYMEX crude futures move in an opposing direction to the greenback, and have followed the path of the euro.

   Major U.S. equities are poised to decline after a series of gains, with the S&P 500 surging in January to a six-month high Thursday on data signals implying the U.S. economy is on a growth trajectory, and fourth quarter

2011 earnings reports that have largely been better than anticipated so far. NYMEX crude futures have correlated relatively closely with the S&P 500.

   February crude futures, which expire at today’s closing bell, fell to a three-day low at $99.44 bbl overnight, with support at $98.00 and the $97.70 current low for January.

   The contango in the calendar spreads are narrowing in front of the expiry, although they have been tight for months, briefly flipping into backwardation in late October, early November 2011.

   The February products contracts are holding to a tight inside trading range so far this session.

   Oil futures were also supported by further weakening in the U.S. dollar in spot index trading, while the euro edged higher following successful bond auctions by France and Spain, with the two countries paying lower interest on their debt sales. European stocks moved higher, while U.S.

equity indices have rallied this week on growing optimism for the U.S.

economy, with stock index futures higher this morning.

   Late Wednesday, the API said U.S. commercial crude inventories were drawn down by 4.089 million bbl for the week-ended Jan. 13 that missed market expectations calling for a build. The steep draw followed a larger-than-expected supply build during the previous week. API data showed total gasoline supply posted a 4.309 million bbl build for the week with distillate supply declining 900,000 bbl.

   The Energy Information Administration will release its data set for last week at 11:00 AM ET, delayed by Monday’s federal holiday in observance of Martin Luther King Jr. Day.

   Oil markets were also pushed higher alongside equities as the International Monetary Fund proposed increasing its lending capacity, and as Greece reportedly made headway with private creditors over its attempts to restructure its debt. Additionally, China said it would allow the country’s five largest banks to increase new loans by 5% in the first quarter, as Beijing looks to offset a slowdown in exports.

   Meanwhile, nearby delivery RBOB futures surged to a three-month high on news that Hess Corp. would shut the HOVENSA L.L.C. refinery in St. Croix, U.S. Virgin Islands, a joint venture between the company and Petroleos de Venezuela S.A., and convert the refinery to an oil terminal. Hess said today that it made the decision due to steep economic losses, with losses at the refinery totaling $1.3 billion in the past three years with no end in sight. Hess said the losses were due to weak demand for products and new refineries built in emerging economies.

   In the Persian Gulf, Iran told Saudi Arabia to be wise, and not to make up for potential lost oil supply to world markets should western nations sanction Iranian oil. The comments follow similar rhetoric made over the Martin Luther King Jr. Day weekend triggered after the Saudis said they would increase their oil production in response to lower exports from Iran amid the possible sanctions.

   France has proposed that countries in the European Union ban Iranian oil imports over Iran’s pursuit of nuclear weapons. Tehran denies the charge.

Nonetheless, the EU was set to make an announcement of such sanctions on Jan. 30, but late last week news surfaced that the proposed sanctions would likely be delayed by six months to allow countries such as Spain, Italy and Greece to find alternative supply sources. The United States which does not import Iranian oil, targeted companies doing business with Iran’s central bank, prompting some companies to reduce their oil imports since many of those transactions move through the bank.

   Iran said earlier this month that it would shut the Strait of Hormuz, where roughly a third of the world’s oil traverses, should sanctions be imposed. The Energy Information Administration said that nearly 17.0 million bpd of oil moved through the strait in 2011.

   This morning, the International Energy Agency revised lower projected global oil demand for 2012 by 200,000 bpd to 90.1 million bpd, which would set year-on-year growth at 1.1 million bpd. The revision follows a 200,000 bpd adjustment lower made in December by the IEA. The Paris-based agency said economic weakness was the reason for the lower projection, while also pointing to a 300,000 bpd decline in fourth quarter 2011 oil demand due to weakening economies and mild winter weather.

   “Clear signs of economic weakness tipped global oil demand into a declining year-on-year trend at the end of 2011,” said IEA, saying the decline in fourth quarter global consumption was “its first such drop since the tail-end of the credit crunch.”