Oil Falls as Reduced U.S. Refinery Activity Curbs Crude Demand

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What's Next For Oil?

Oil fell for a second day after the biggest drop in U.S. refinery activity in four months cut crude demand.

Refinery utilization slowed by 1.8 percentage points last week, the biggest decline since Jan. 16, the U.S. Energy Information Administration said Wednesday. Oil supply from both the Organization of Petroleum Exporting Countries and U.S. shale drillers is set to expand later this year, weighing on prices, hedge fund manager Pierre Andurand said.

Oil’s recovery from a six-year low is stalling near $60 a barrel amid speculation that the price rebound will sustain a supply glut. U.S. crude stockpiles remain more than 100 million barrels above the five-year average for this time of year and producers are pumping near a record pace.

“The market is still trying to figure out what to make of yesterday’s refining number,” Bob Yawger, director of the futures division at Mizuho Securities USA Inc. in New York, said by phone. “It changes the whole nature of the market because it was unexpected. Any decline would have been a surprise but this was the biggest we’ve seen since January.”

West Texas Intermediate for June delivery fell 62 cents, or 1 percent, to settle at $59.88 a barrel on the New York Mercantile Exchange. Total volume was 9.9 percent below the 100-day average at 2:51 p.m. Prices are up 12 percent this year.

Refinery Utilization

Brent for June settlement, which expired Thursday, fell 22 cents, or 0.3 percent, to end the session at $66.59 a barrel on the London-based ICE Futures Europe exchange. The more-active July contract slipped 57 cents to $66.70. Volume was down 24 percent from the 100-day average. Brent has risen 16 percent this year. The European benchmark crude closed at a $6.71 premium to WTI.

U.S. refineries operated at 91.2 percent of capacity last week, down from 93 percent in the prior seven days, according to the EIA. A 0.5 percentage point gain was projected by analysts surveyed by Bloomberg before the report.

“I’m very surprised by the refinery utilization number,” Tom Finlon, Jupiter, Florida-based director of Energy Analytics Group LLC, said by phone.

Crude inventories shrank by 2.2 million barrels to 484.8 million. While that’s a second weekly decrease, supplies are still near the highest level since 1930, based on monthly records from the EIA dating back to 1920. Gasoline stockpiles fell 1.14 million barrels to 226.7 million. Supplies of distillate fuel, a category that includes diesel and heating oil, dropped 2.5 million to 128.3 million.

Oil Drillers

U.S. crude production rose by 5,000 barrels a day to 9.37 million, the data showed. Output averaged 9.42 million a day in the week to March 20, the most since at least January 1983. Oil drillers cut the number of rigs to 668 last week, the least since September 2010, said Baker Hughes Inc., an oil-services company. The rig count has dropped 58 percent since December.

“Global production is still rising,” John Kilduff, a partner at Again Capital LLC, a New York-based hedge fund that focuses on energy, said by phone. “Production here was up last week despite the declines in the rig count. The shale producers haven’t gone away.”

Prices will remain “relatively low” for the next two years as recent gains allow U.S. producers to revive output, said Andurand, who generated a 38 percent return in 2014 from wagering that oil would fall. At the same time, Saudi Arabia, the United Arab Emirates and Kuwait are raising their production, he said.

Downward Pressure

“We’ll be in a market where both U.S. production will go up and OPEC,” Andurand said in a Bloomberg Television interview with Stephanie Ruhle at the Commodity Debate conference in New York on Thursday. “It’s going to be difficult for prices to go much higher in the short term.”

Gulf-based members of OPEC are boosting production to defend market share, according to the International Energy Agency. Oil supplies from Saudi Arabia, Kuwait and the United Arab Emirates remain near the highest level in three decades, the IEA said in a monthly report Wednesday.

Saudi Arabia led OPEC’s decision Nov. 27 to maintain collective quotas at 30 million barrels a day. The group, scheduled to meet again June 5 in Vienna, has supplied above that target for the past 11 months, according to a Bloomberg survey of companies and analysts.

In Libya, Eni SpA is producing about 300,000 barrels a day of crude, bringing its output above pre-civil war levels amid strife in the OPEC nation. Oil prices will average $55 to $60 a barrel this year, Chief Executive Officer Claudio Descalzi said in an interview in Rome Wednesday.

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