Oil drops on rising U.S. crude inventories, defies expected supply cut extension
Oil prices fell on Wednesday after data showed an increase in U.S. crude inventories, stoking concerns that markets remain oversupplied despite efforts by top producers Saudi Arabia and Russia to extend output cuts.
Brent crude was down 41 cents, or 0.8 percent, from the last close at $51.24 per barrel at 0534 GMT.
U.S. West Texas Intermediate (WTI) crude was at $48.23, down 43 cents, or 0.9 percent.
U.S. crude inventories rose by 882,000 barrels in the week ending May 12 to 523.4 million, data from the American Petroleum Institute (API) showed on Tuesday.
Brent reached $52.63 a barrel on Monday and WTI rose as high as $49.66 a barrel after Saudi Arabia and Russia agreed on the need for a 1.8 million barrels per day (bpd) crude supply cut by the Organization of the Petroleum Exporting Countries (OPEC) and some other producers to be extended until the end of March 2018.
“The vulnerability of OPEC’s … rhetoric was starkly revealed … as the U.S. API crude inventories showed an unexpected increase,” said Jeffrey Halley of futures brokerage OANDA.
The extension of the supply cuts, which started in January and were supposed to end in June, is seen as necessary by some as they have not so far significantly tightened the market or propped up prices.
“The agreement by OPEC to extend cuts into 2018 is critical,” said AB Bernstein in a note.
The International Energy Agency said on Tuesday that commercial oil inventories in industrialized countries rose by 24.1 million barrels in the first quarter of 2016, despite the cuts.
Adding to concerns of ongoing supply increases, North Sea oil production, which has long been seen as in terminal decline, is expected to jump by a net 400,000 bpd, or about a fifth of total output, in the next two years as producers improve operational efficiency.
This adds to a relentless rise in U.S. production, which has jumped by over 10 percent since mid-2016 to 9.3 million bpd, not far off top producers Russia and Saudi Arabia.
Investment bank Jefferies said it was lowering its oil price forecasts “between 3 percent (2H17) and 22 percent (2019)” due to a surprisingly strong production rise, especially in the United States.
Jefferies said its new Brent price estimate for the second half of 2017 was $59 per barrel, down from $61 previously.
It lowered its forecast for 2018 Brent from $72 per barrel to $64 per barrel, and cut its estimate for 2019 from $85 per barrel to $67 per barrel.