Oil prices fall despite drop in US crude stocks

Oil prices headed for weakest performance for first six months of a year since 1997

Oil prices fell about two per cent to a 10-month low in heavy trading on Wednesday despite data from the US Energy Information Administration that showed a drop in US crude and gasoline inventories.

Brent crude futures ended the day down $1.20 to $44.82/barrel.  US crude futures fell 98 cents to a low of $42.53, after touching a low of $42.13, the lowest intraday level since August 2016.

Since peaking in February, oil prices have tumbled over 20 per cent, with a few brief rallies.

Reuters reports over 1 million front-month crude contracts were traded on Wednesday, far exceeding the daily average of 560,000 contracts.

According to the US EIA, crude inventories fell by 2.7 million barrels, more than the expected 2.1 million-barrel drop.  Despite the reduction in crude stocks, investors remained concerned about the global oil glut and high worldwide production.

“Updated inventory balances don’t represent a game changer,” Anthony Headrick, energy market analyst at CHS Hedging LLC told Reuters. “Particularly while lower 48 crude production rose 25,000 barrels per day.”

In a Reuters’ report, Iran’s oil minister Bijan Zanganeh said OPEC members are considering deeper output cuts, but such a decision should wait until the effect of the current level of production is clear.

Other delegates were reported to be skeptical of such measures.

“Market fundamentals have not changed,” Abhishek Kumar, senior energy analyst at Interfax Energy’s Global Gas Analytics told Reuters in an interview. “U.S. crude and gasoline stockpiles are significantly higher compared with their five-year averages, which will weigh on prices. Meanwhile, oil output in the country is still rising.”

Commerzbank analyst Eugen Weinberg summed up the market mood in an interview with Reuters.  “Now everyone seems to be negative,” said Weinberg.

Compliance by participants in the OPEC supply cut pact was reported to be at 106 per cent earlier this week.  But, rising production from Nigeria and Libya, two OPEC members exempted from the agreement, has bumped up OPEC’s overall production numbers.

BMI Research says that despite high compliance, activity prior to the onset of the OPEC deal makes the current reduction in production less potent.

According to BMI, producers including Iraq, Saudi Arabia and Russia “aggressively ramped up output in the run-up to the deal, fast-tracking projects, expanding drilling programs and deploying spare capacity.”

US oil production has jumped by over 10 per cent since the middle of 2016, and at 9.35 million barrels per day is nearing Saudi Arabia’s and Russia’s production levels.