Crude oil prices followed natural gas lower Thursday after the government reported that underground supplies of natural gas were bigger than expected.
A manufacturing report showing contraction also dragged on energy prices.
On Thursday, the Energy Department said that underground storage for natural gas decreased by 186 billion cubic feet last week to 2,571 billion cubic feet. But analysts had predicted a larger drawdown of 205 billion cubic feet, according to a Dow Jones Newswires survey.
Storage stockpiles also remain higher than last year and above the five-year average.
"That took a little of the bullish momentum out of the market today," said Phil Flynn, an analyst at Alaron Trading Corp. in Chicago. "And the manufacturing report, which showed the economy slowing a bit, may have tempered some of the bullish sentiment as well."
The Institute for Supply Management reported Thursday that the nation's manufacturing sector contracted in January, surprising most economists who expected growth.
Natural gas prices fell 16.7 cents to $7.500 per 1,000 cubic feet on the New York Mercantile Exchange. Prices had risen as high as $7.966 this week, a 16.8 percent gain from the week's low, on expectations of continued cold weather in the Midwest.
Tim Evans, energy analyst at Citigroup Global Markets, expects the natural gas bulls will return soon, however.
"I think the story on the natural gas storage numbers is more disappointing than bearish," Evans said. "There was still an above average withdrawal, so it's still a supportive number."
The decline in natural gas led crude oil lower after a two-day rally that saw oil prices rise by more than $4 a barrel. Light, sweet crude for March delivery on the Nymex fell 66 cents to $57.48 a barrel in afternoon trading. The contract rose $1.17 a barrel on Wednesday and by $2.96 on Tuesday.
The Brent crude contract for March fell 45 cents to $56.95 a barrel on London's ICE Futures exchange.
Forecasts of colder-than-normal temperatures in the U.S. Northeast and a new round of OPEC production cuts has buoyed the market of late. The Organization of Petroleum Exporting Countries was set to begin its second round of production cuts, announced late last year, of 500,000 barrels a day of crude oil.
While most analysts and tanker trackers believe the cartel has fallen well short of its first cut, Saudi Arabia added support to prices this week when it said it would cut its share – 158,000 barrels a day – starting Thursday.
"At least the top dog has indicated they're going to comply with their share of the output cut," said Victor Shum, an energy analyst with Purvin & Gertz in Singapore. "What's emerging is quite clear: The supply-demand balance is tightening even if OPEC doesn't fully comply with the cuts. Oil demand is also likely to remain strong, as the latest economic data out of the United States indicates."
The U.S. Energy Information Administration's weekly inventory report on Wednesday was close to what most traders were expecting, and reaffirmed the belief that U.S. supplies of crude and gasoline remain abundant, but recent cold weather has been eating into heating fuel supplies.
The EIA said crude oil inventories rose last week by 2.7 million barrels to 324.9 million barrels; gasoline inventories rose by 3.8 million barrels to 224.6 million barrels; and distillate inventories – which include heating oil and diesel fuel – fell by 2.6 million barrels to 140.0 million barrels. A decrease in heating oil offset a small increase in diesel fuel.
In other Nymex trading, heating oil dropped nearly 2 cents to $1.6639 a gallon. Gasoline futures fell nearly 3 cents to $1.5244 a gallon.
