Oil ends lower; large trade spurs fund speculation

SAN FRANCISCO (MarketWatch) � Oil futures dropped Wednesday after a large block of trades in the market fostered speculation that a commodity fund was forced to liquidate ahead of the expiration of the March futures contracts.

Traders also weighed talk that Saudi Arabia may boost oil production and a report that the United Nations may make an offer to Iran to resolve the dispute over the country�s nuclear program. Weekly data on petroleum inventories was on tap for late Wednesday and early Thursday.

For oil, �it seemed to be a mass exodus,� said Phil Flynn, senior market analyst at Price Futures Group. Contract expiration �coupled with talks of a deal with Iran and rumors of a hedge fund liquidation caused all bulls to run for cover.�

Crude oil for March delivery fell by $2.20, or 2.3%, to settle at $94.46 a barrel on the New York Mercantile Exchange, the lowest settlement for a front-month contract since Jan. 16. The contract expired at the end of the Nymex trading session.

April crude oil CLJ3 , which became the front-month contract, settled at $95.22 a barrel, down $1.88, or 1.9%.

Reuters American Petroleum Institute is set to issue its weekly inventory report late Wednesday.

The market was hit by a large block of trades, spurring speculation that a commodity fund �got on the wrong side of the market� � that a fund was in trouble and was �forced to liquidate,� said Stephen Schork with the Schork Group.

Nanex, which supplies real-time data services, reported that the April crude-oil futures contract was hit with over 2,500-contract trade order within two seconds Wednesday morning, sending oil prices sharply lower.

Adding to the mystery, Nanex spokesman Eric Hunsader said that although there was no official halt, data showed that trading in all of the crude-oil futures contracts �did halt for 10 seconds� Wednesday morning. There weren�t any trades or quotes in that 10-second time period from the CME in crude oil and �that should mean a halt,� he said.

A spokesman for the Chicago Mercantile Exchange, which owns the Nymex, said that �while there was active trading in our Nymex crude complex, no trading halt was triggered today.�

Adding further price pressures Wednesday, a Bloomberg report, citing comments from a Western diplomat said that the five permanent United Nations Security Council permanent members plus Germany will make a serious offer to Iran to resolve the dispute over its nuclear program when they hold talks next week.

And the prices were also hit by talk of a possible increase in production by Saudi Arabia in the second quarter of this year, said Matthew Parry, senior oil-market analyst at the International Energy Agency. It wasn�t clear where the speculation originated from, but several analysts mentioned it Wednesday.

Wednesday�s oil moves follow March crude�s 80-cent advance on Tuesday. Those gains came in the wake of upbeat German data, and as the S&P 500 SPX rallied to a new five-year high. See: Oil futures end higher, back above $96 a barrel.

Prices for the March and April crude contracts pared losses in the aftermath of the release of minutes fro the Federal Reserve�s January meeting, but stayed within the day�s wide trading ranges.

The minutes revealed that Fed officials planned to review its quantitative-easing program in March. Read: Uneasy about QE, Fed plans debate on program.