Oil Falls Amid Speculation U.S. Supply Decrease Won't Ease Glut

  • Stockpiles drop by 4.94 million barrels as output falls: EIA
  • Investors waiting for producer meeting in Doha on April 17

Oil Surges on Drop in U.S. Supply

Oil fell amid speculation that an unexpected U.S. crude supply decline won’t be followed by additional drops.

Futures slipped 1.3 percent in New York after surging 5.2 percent Wednesday. Inventories slid by 4.94 million barrels last week as imports fell, according to an Energy Information Administration report. A meeting between OPEC members and Russia is set to take place on April 17 in Doha to discuss freezing oil production in a bid to stabilize the markets.

"We had a pretty good rally on the inventory data yesterday," said Bill O’Grady, chief market strategist at Confluence Investment Management in St. Louis, which oversees $3.4 billion. "There was a gain in refinery runs last week and a drop in imports. The weekly import data is volatile and I wouldn’t be surprised if there was a gain next week."

Prices have whipsawed since Friday on speculation about whether an accord can be reached in Doha. Saudi Arabia said it will only agree to a freeze if it’s joined by other suppliers including Iran, while Kuwait said a deal can be done without Iran’s support.

Exaggerated Move

West Texas Intermediate for May delivery fell 49 cents to settle at $37.26 a barrel on the New York Mercantile Exchange. The contract advanced $1.86 to $37.75 on Wednesday, the biggest gain in three weeks.

Brent for June settlement dropped 41 cents, or 1 percent, to $39.43 a barrel on the London-based ICE Futures Europe exchange. The front-month contract’s discount to the second-month slipped 6 cents at the end of the session, the least since January. The global benchmark crude closed at a 94-cent premium to WTI for June delivery.

"The market has been all over the place today," said Gene McGillian, a senior analyst and broker at Tradition Energy in Stamford, Connecticut. "We need more than just one week of crude inventory declines to signal that the market is rebalancing. Yesterday’s move was a bit exaggerated."

U.S. crude production dropped by 14,000 barrels a day to 9.01 million a day, the EIA said in a report Wednesday. Refinery utilization rates rose ahead of the summer driving season by 1 percentage point for a second weekly gain to 91.4 percent of total capacity. Imports fell to 7.25 million barrels a day, the lowest level in two months.

Fuel Stockpiles

Refineries bolstered operating rates to the most in three months. Gasoline supplies rose 1.44 million barrels last week, the first increase in seven weeks. Stockpiles of distillate fuel, a category that includes heating oil and diesel, climbed 1.8 million barrels. 

"We’re at a time of year where refineries are ramping up production but demand has yet to pick up," said Rob Haworth, a senior investment strategist in Seattle at U.S. Bank Wealth Management, which oversees $128 billion of assets. "Last week crude inventories fell and ended up as gasoline inventories."

May gasoline futures declined 1 percent to close at $1.3812 a gallon. Diesel for May delivery decreased 1.3 percent to $1.1257 a gallon.

The Doha meeting is unlikely to have an impact on actual supply without the participation of OPEC members Libya and Iran since both countries have the “most capacity headroom,” according to Michael Hsueh, a strategist at Deutsche Bank AG.

"I suspect there won’t be any agreement to cut or freeze output, but that doesn’t mean the meeting is not important," said Sarah Emerson, managing director of ESAI Energy Inc., a consulting company in Wakefield, Massachusetts. "They’re going from no discussion or game plan to talking and a potential game plan, which is progress. This is more about the process than the outcome."

Oil-market news:

  • Crude at $38 a barrel is above cash costs of production, but still low enough to deter a rebound in shale output from occurring too early, Goldman Sachs Group Inc. New York-based analysts including Brian Singer said in a report dated April 6.
  • Ecuador will host Latin American suppliers on Friday to coordinate a regional position ahead of the Doha meeting, President Rafael Correa said.
  • The Keystone oil pipeline that ships 590,000 barrels a day of Canadian crude to the U.S. may restart early next week, according to TransCanada Corp.
  • Iran plans to boost output to 4 million barrels a day by the end of the current Iranian year in March 2017, the Oil Ministry news service Shana reported, citing Oil Minister Bijan Namdar Zanganeh.
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