If you watched the overnight price trend in U.S. crude oil futures, you could see traders' mindset changing as they approached the time for the Energy Department's weekly inventory report. Prices have been well-bid and rising after Tuesday's higher close and a broad consensus among analysts and industry insiders for an impending drawdown in crude oil stocks.

When the government's numbers were published this morning, however, that consensus proved wrong. Domestic crude oil inventories rose by 400,000 barrels, said the Energy Department, dashing the American Petroleum Institute's call for a 241,000-barrel decline in supplies. The Street had been looking for a drawdown between 1.0 million and 1.6 million barrels.

There were surprises in the product forecasts as well. Gasoline inventories, which were estimated by the API to have fallen by 412,000 barrels, instead spiked higher by 1.1 million barrels in the government report. Analysts, however, were pretty much on target with calls for a build between 1.0 million and 1.1 million barrels.

Estimates of distillate fuel levels were universally low. The API said that stocks, including diesel and heating oil, increased by 979,000 barrels, while analysts cast their lot with forecasts of build between 1.5 million and 1.6 million. The government's report of a 3.9-million increase floored everybody.

Along with the higher inventory numbers, the Energy Department said refinery usage, expected to tick down to 90.3 percent, instead rose a full percentage point to 91.5 percent.

Refiners utilized that capacity to crank up distillate production to a daily average of 4.5 million barrels, while gasoline production declined to 9.3 million barrels.

Government data showed gasoline demand rose 2.0 percent from year-go levels to an average 9.4 million barrels per day, as distillate fuel consumption, at 3.6 million barrels daily, is 9.0 percent higher.

Trading Week

For the week ending with Tuesday's NYMEX floor session, crude oil inched 0.4 percent higher, while gasoline slipped 0.1 percent and heating oil fell 0.9 percent. Accordingly, gross refining margins were compressed. Profits for gasoline-rich runs fell to 12.2 percent, while distillate-heavy operations earned 12.0 percent. A week ago, the spread between the two refining runs was only 7 basis points (0.07 percent) vs. 23 basis points.

Average daily volume for NYMEX WTI crude rose 2.5 percent this week to 580,660 contracts. Open interest as of Tuesday was off 62,145 contracts, or 2.8 percent, from last week. Open interest averaged 1.254 million contracts this week.

Contango narrowed significantly in the WTI market this week as the August NYMEX contract reached expiry. A three-month roll fell from $1.57 to $1.22 a barrel.

Despite the narrowing spread, crude oil stocks at the Cushing, Okla. delivery terminus jumped by 1.0 million barrels, or 2.8 percent, to 37.1 million.

WTI's per-barrel premium to heavier North Sea Brent ballooned to an average $1.69 vs. 81 cents last week.

The Technical Picture

Spot WTI crude had been knocking on the door at $78 on notions of a tighter market. Prices closed above their 200-day moving average for the first time since June 28.

Today's inventory report knocked the stuffing out of the market, sending prices tumbling as low as $76.60 basis September.

Support rests near the $76 level today. A close below that level would inflict technical damage to the current upswing.

Near-term resistance is at $77.63, while support should be expected at $74.25.

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