Oil falls on the shock of US stock increases and Opec supply worries

New York — Oil benchmarks fell on Wednesday after an unexpected build in US crude and petrol inventories despite strong demand, and as traders weighed the possibility of an increase in oil cartel Opec crude output to cover any shortfalls in supply from Iran and Venezuela.

US crude inventories rose 5.8-million barrels last week, while petrol stocks increased by 1.9-million barrels, the Energy Information Administration (EIA) said. Both builds were unexpected, as a Reuters poll called for a drawdown in both figures as summer demand starts to heat up.

Overall demand for refined products in the US has kept refining activity buoyant, helping drain crude inventories in the world’s largest consuming nation.

“A 5.8-million-barrel build is kind of like a slap in the face, where it’s like, ‘Where did this oil come from?’ And as you look through the numbers, it doesn’t make a lot of sense,” said Phil Flynn, analyst at Price Futures Group in Chicago. “It is definitely a shock to the system.”

The increase in US inventories came from a combination of reduced exports and rising imports; the latter is somewhat surprising, Flynn said, because Brent crude is currently trading at a $7 premium to US crude, making exports more advantageous right now.

Brent crude futures were trading $1.08, or 1.4%, lower at $78.45 a barrel as of 2.54pm GMT, while US crude lost 85c to $71.35 a barrel.

Across the broader financial markets, investors dumped equities and other industrial commodities in favour of the yen, US and German government bonds, and gold, as concern mounted that setbacks to US-China trade talks would undermine increasingly fragile-looking world growth.

Oil prices have gained nearly 20% this year, with Brent briefly rising above $80 a barrel, driven primarily by co-ordinated supply cuts by Opec and partners, including Russia. Opec may decide to raise oil output as soon as June due to worries over Iranian and Venezuelan supply and after Washington raised concerns the oil rally was going too far, Opec and oil industry sources familiar with the discussions told Reuters.

“It does seem like any move above $80 attracts selling interest right now and that could potentially lead us to a period of consolidation, where I think $77.50 or even $75 might be in focus,” Saxo Bank senior manager Ole Hansen said.

The price has also been affected by rising geopolitical tensions that could dent global output, just as demand is set to hit 100-million barrels per day (bpd) in the final quarter of this year, according to the International Energy Agency (IEA).

In addition, the US plans to re-impose sanctions on major oil producer Iran, while an economic crisis has decimated Venezuela’s crude output. With uncertainty over how sanctions might affect Iranian supply, fund managers have cut their holdings of crude futures and options by more than 10% in the last seven weeks to the lowest level this year.

Rising supply in the US has limited the upward move in prices. US crude output last week rose modestly to 10.7-million bpd, a record, keeping it in second place behind Russian production of 11-million bpd.

Reuters