OREANDA-NEWS. August 12, 2010.  Oil prices skidded Wednesday to a 2-week low on a mid-week report showing large builds in gasoline and distillates inventories weakness in the US economy, and a slide in equities.

Crude oil for September delivery plunged USD 2.23, or 2.8%, to USD 78.02/bbl on NYMEX. The contract has lost 5.5% since reaching a 12-week high of USD 82.55/bbl on August 3. Brent crude oil for September settlement slipped USD 1.96, or 2.5%, to end the session at USD 77.64/bbl on the London-based ICE Futures Europe Exchange.

The EIA reported an increase of 400,000 bbl for gasoline inventories, and a rise of 3.5 mn bbl for stockpiles of distillates, which include heating oil and diesel. The consensus forecast had called for a drop of 1.5 mn bbl for gasoline stocks, and an increase of 1.1 mn bbl for distillates. These dismal products stats were not offset by a 3 mn bbl drawdown in crude oil stockpiles.

Heightening these concerns, data from China and Japan spawned worries over a slowdown in global economic growth and its impact on energy demand. Chinese reports on industrial production and fixed-asset investments were the latest reports indicating a cooling, while Japan saw a weaker-than-expected machinery orders report.

Meanwhile, the US government said the trade deficit widened to USD 49.9 bn in June, overshooting expectations. A stronger dollar also helped push oil prices lower, with the dollar index, which compares the US unit to a basket of six currencies, rising 1.9% to 82.30 and strengthening through the day.

However, the recent decline in energy prices should not last too long, given that the market is entering the most intense period of the hurricane season. The National Hurricane Center confirmed late Tuesday that a tropical depression has formed over the Gulf of Mexico and is on a track to reach key oil-producing and oil-refining areas later this week.

Moving forward, in light of the Fed’s recent acknowledgement of slowing growth, signs of weakness in the Chinese economy, lackluster inventories and the end of earnings season, we think the case for oil above USD 80 looks quite precarious right now. And despite the hurricane season, we could see oil slip back to its earlier USD 70-80 range unless some seriously good news comes along in short order.