A small drawdown in crude oil inventories was accompanied by a much-larger-than-expected build in gasoline stocks, according to the latest government figures.

Crude oil futures held steady around $78 a barrel ahead of the Thursday NYMEX day session opening as traders awaited the weekly U.S. Energy Department inventory report. The front-month crude contract settled 1.8 percent lower on Wednesday as the dollar's strength and concerns about the impact of Chinese lending restrictions weighed on the market.

After Wednesday's settlement, an American Petroleum Institute report forecast a 1.8-million-barrel drawdown in crude oil supplies. Analysts, however, had been expecting a build in stocks of 1.9 million to 2.4 million barrels. This week, traders sided with analysts' views as crude prices notched down 3.9 percent.

API also called for distillate inventories, which include heating oil and diesel supplies, to decline by 3.4 million barrels. Oil patch watchers mostly thought distillate stocks would remain unchanged, despite this week's 5 percent price markdown.

Gasoline stocks were likely to rise by 667,000 barrels, according to API, less than analysts' prediction of a 1.1-million- to 1.7-million-barrel increase. This week, gasoline prices fell 2.5 percent.

The API's oil forecast was vindicated, if only slightly, by the Energy Department report of a 400,000-barrel drawdown. The industry group's prognostication of distillate supplies was nearly spot-on, though, as the government reported a 3.3-million-barrel decrease. Both the API and analysts grossly underestimated the build in gasoline inventories, however. Stocks rose by 3.9 million barrels, according to the Energy Department.

The government also said refineries operated at 78.4 percent of capacity last week, far below the Street's estimate of an 80.8 percent utilization rate. Still, gasoline production increased, averaging 8.6 million barrels per day, while daily production of distillate fuels decreased to an average 3.5 million barrels.

The disparate losses in heating oil and gasoline heralded a seasonal shift in refining mixes. The wintertime premium in the 2-1-1 crack has now turned to discount, as refiners ready their operations for a summer mix emphasizing gasoline. Margins on a 3-2-1 operation stood at 10.9 percent versus a 10.7 percent spread for 2-1-1 operations. This is the earliest switchover in four years; typically, the winter premium doesn't evaporate until February.

Gasoline demand, according to the Energy Department, now averages 8.8 million barrels per day, down 0.2 percent from a year ago. Distillate fuel demand, at 3.7 million barrels per day, is down 6.8 percent.

NYMEX-Implied Refining Margins

Collaterally, the premium commanded by lighter, sweeter West Texas Intermediate crude over North Sea Brent shrank to an average $1.89 a barrel this week. Last week, WTI sold for $2.30 more than the European crude.

The NYMEX three-month roll also came in this week, narrowing to its lowest level since October 2009.

Aggressive selling characterized the crude oil market recently, as the largest net short position in five years was chalked up by commercial futures traders. Most of the fresh short sales came from swaps dealers.

With the February crude contract settling on its last trading day Wednesday, the March contract has moved to front-month status on NYMEX. March's close at $77.60 puts it under its 50-day moving average, after a bounce from a key retracement level of the December-January rally. Resistance, near term, is at $78.80, while support rests at $77.03.

Volatilitywise, March crude is slightly oversold, but other technical indicators point to the likelihood of lower prices. If support at $77.03 is taken out, the psychologically important $75 level becomes a target, under which the $72.45 pivot point could be challenged.