Brent oil for May settlement slid USD 2.52, or 2%, to end the session at USD 122.34/bbl on the London-based ICE Futures Europe exchange. May NYMEX crude dropped USD2.54, or 2.4%, to USD 101.47/bbl, the lowest settlement since February 14. The European benchmark contract settled at a USD 20.87 premium to WTI, the widest spread since October. Oil tumbled after the Energy Department said US stockpiles surged the most since 2008 as domestic crude output climbed to the highest level in 12 years. In addition, investors contemplated an environment without monetary accommodation and a Spanish bond auction was poorly received. The Energy Information Administration reported ((an surge)) in crude stockpiles by 9 mn bbl in the week ended March 30. The consensus forecast was calling for a build of 1.9 mn bbl. Gasoline inventories declined 1.5 mn bbl, while supplies of distillates were unchanged. The median estimate had expected gasoline supplies down 1.6 mn bbl, while supplies of distillates had been seen down 600,000 bbl. We attribute the high inventory numbers to two main factors: a rise in US output and soaring imports. Crude output last week was at the highest level since December 1999. Domestic production averaged over four weeks rose 5.2% in y-o-y terms. The increase in US oil production reflects a change in the way the Energy Department estimates output. The weekly estimates rely on monthly production tallies that the department calculates using state reports and Interior Department data. In the past, the Energy Department revised its monthly figures once a year based on updated state and federal numbers. In April, the department began incorporating that information on a monthly basis. As for the import factor, crude imports rose 5.4% to 9.7 mn bpd, the highest level since the period ended January 6. Fuel imports surged 15% to 2.04 mn bpd, the most in two months. Higher imports are also due to fog-related delays in key Texas oil-shipping channels in March, which have pushed crude inventories up more than 16 mn barrels in the two weeks to March 30, the biggest two-week increase since March 2001, data from the Energy Information Administration showed. The word on the street in Washington is that the economy is still at risk of slipping into a severe recession due to ‘oil shock’ with skyrocketing gasoline prices approaching the 2008 all-time highs. For this reason, and in view of the upcoming election in November, we believe the Obama administration has opted to play the inventory card in the face of gasoline prices near USD 4.00 and as a counterpoise to the Iran premium, which has driven prices skyward in recent months. Oil also retreated after the Federal Reserve signaled it may refrain from further monetary accommodation unless the economy falters or prices rise at a rate slower than its 2% target, according to the minutes of its March 13 policy meeting released yesterday. The central bank affirmed its plan, first announced in January, to hold interest rates near zero through late 2014 as the economy’s improvement may not be sufficient to lower the outlook for coming years. There had been speculation the Fed would proceed with a third round of bond purchases in a tactic that has been dubbed quantitative easing. The Fed bought a total of USD 2.3 tln in bonds from December 2008 to June 2011. The recent release of the Fed minutes confirmed to the market that there will not be any QE3. Markets also moved lower after Spain sold fewer bonds than its maximum target, reigniting concerns that the European debt crisis will spread. Spain sold EUR 2.59 bn of bonds, just above the minimum amount it planned for the auction and below the EUR 3.5 bn maximum target. Moving forward, after yesterday’s triple whammy (inventories, Fed minutes and Spanish auction) we see both benchmarks under pressure barring a flareup in tensions with Iran, which could follow the next round of talks in Turkey, although there is also increasing talk of a diplomatic solution. In the upshot, the next market mover will be tomorrow’s March employment report, which could show slightly more than 200,000 new jobs created. If fewer than 200,000 jobs are announced, the downturn in oil could gather momentum, as even now many analysts believe WTI could test the USD 100 mark in the near future.