Oil Climbs as U.S. Stockpiles Shrink

By Justin Yang and Jenny W. Hsu Features Dow Jones Newswires

Crude prices continued their advance Wednesday on expectations that U.S. inventories likely shrank again last week.

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Brent crude, the global oil benchmark, rose 1.6% to $48.28 a barrel on London's ICE Futures exchange in morning trade. On the New York Mercantile Exchange, West Texas Intermediate futures were trading up 1.75% at $45.83 a barrel.

Oil prices rose 1.4% in the U.S. session Tuesday, after industry group the American Petroleum Institute's data pointed to an 8.1-million-barrel drawdown in U.S. crude supplies last week. If confirmed by the U.S. Energy Information Administration weekly production data later Wednesday, it would show strong U.S. gasoline demand thanks to the annual summer driving season.

"If the EIA number is similar to the API's, expect some immediate strength in the market," said an ING Bank note.

The price gains come even as U.S. oil production has continued to increase. Until there is a persistent downtrend in oil rig count and production, it would be premature to say that U.S. producers have felt the heat from recent oil price weakness, Goldman Sachs said.

"We believe the coming month will be key to testing whether producers are responding to the signal of $45/bbl. WTI prices," the bank said, adding the coming earnings seasons will also be an important indicator of American producers' resilience.

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U.S. production is expected to increase in 2018, albeit at a lower rate than previously estimated. Tuesday's revised short-term energy outlook report from the EIA showed a lower production forecast for 2018 to 9.9 million barrels a day, slightly down from around 10 million before. That would still set the record for annual production, exceeding 9.6 million barrels a day in 1970. It would also be higher than the estimated production for 2017, at 9.3 million barrels a day.

"There's been speculation of how long U.S. production would continue to be able to rise considering the selloff we've seen in recent months. That was the first official sign that there could be some downgrades coming," said Ole Hansen, head of commodity strategy at Saxo Bank, on the new report.

Investors will be watching for changes in global crude inventories levels and production, two data points that will be featured in the Organization of the Petroleum Exporting Countries' monthly report due later Wednesday.

Some preliminary reports show OPEC production inching higher in June, mostly led by Nigeria and Libya, the two member nations exempt from the OPEC-led production cut deal. Estimates by S&P Global Platts put OPEC's June production up slightly from May at 32.49 million barrels.

Production by the two African nations has surged in the past three months, raising concerns from other OPEC members. Representatives from Nigeria and Libya have been invited to an OPEC meeting in Moscow later July to discuss whether to include the countries in the curtailment plan, cartel delegates say.

Nymex reformulated gasoline blendstock--the benchmark gasoline contract--rose 0.88% to $1.53 a gallon. ICE gasoil changed hands at $444.50 a metric ton, up $10.75 from the previous settlement.

Write to Jenny W. Hsu at jenny.hsu@wsj.com

Oil prices are holding to small gains Wednesday on falling U.S. inventories.

Crude storage levels fell by 7.6 million barrels in the week ended Friday, the U.S. Energy Information Administration said Wednesday morning. That is more than double the draw estimated by analysts surveyed by The Wall Street Journal and nearly confirmed a drawdown of 8.1 million barrels that the American Petroleum Institute estimated Tuesday evening.

The market had surged after that report Tuesday, sending prices higher into the morning. It has pared gains since the EIA report Wednesday morning, likely from automated-trading systems that are following a pattern from recent months of selling off after similar data or reports that might indicate an end of oversupply in the markets, brokers said.

Light, sweet crude for August delivery recently gained 25 cents, or 0.6%, to $45.29 a barrel on the New York Mercantile Exchange. Brent, the global benchmark, gained 1 cents, or 0.02%, to $47.53 a barrel on ICE Futures Europe. They had both traded at gains much larger -- beyond 2% -- before the EIA's data release at 10:30 a.m. EDT.

The EIA's weekly storage update for the U.S., the world's largest consumer, is considered as a leading indicator of the balance between supply and demand. It has become especially important in recent months as market watchers await signs that output cuts from the world's big exporters are affecting a longstanding glut.

Commercial crude stockpiles fell to 495 million barrels, EIA said. It is the 11th decline in the last 13 weeks.

Gasoline stockpiles also fell by 1.6 million barrels, compared with analysts' expectations of a 300,000-barrel addition. That helped bring total commercial stocks of crude and all oil-based products down 3.9 million barrels to 1.3 billion barrels. That is down 1.2% from a year ago.

"Those were bullish stats," said Scott Shelton, broker at ICAP PLC. But "the market loves rallying for no reason, and then selling off on good data."

That has been a pattern for several months, with many traders still skeptical of a changing market because U.S. production is rising and stockpiles aren't falling as quickly as some expected. Commercial crude levels, at 495 million barrels, are still 0.9% higher than they were a year ago, according to EIA data. U.S. production rose 0.6% in the past week to 9.4 million barrels a day. It was at just 8.6 million a year ago.

The rest of Wednesday's trading will be critical, brokers said. Automated systems that follow momentum have taken such sway in the market, that the negative momentum from the past several months has become hard to break.

"If this settles just barely unchanged today, that's horrible," said Kyle Cooper, a consultant for Ion Energy Group in Houston. "It tells you how many (bearish traders) are out there."

U.S. production is expected to increase in 2018, albeit at a lower rate than previously estimated. Tuesday's revised short-term energy outlook report from the EIA showed a lower production forecast for 2018 to 9.9 million barrels a day, slightly down from around 10 million before. That would still set the record for annual production, exceeding 9.6 million barrels a day in 1970. It would also be higher than the estimated production for 2017, at 9.3 million barrels a day.

"There's been speculation of how long U.S. production would continue to be able to rise considering the selloff we've seen in recent months. That was the first official sign that there could be some downgrades coming," said Ole Hansen, head of commodity strategy at Saxo Bank, on the new report.

Gasoline futures recently gained 0.1%, to $1.5199 a gallon, and diesel futures lost 0.3%, to $1.4723 a gallon.

--Justin Yang contributed to this article.

Write to Timothy Puko at tim.puko@wsj.com

(END) Dow Jones Newswires

July 12, 2017 11:53 ET (15:53 GMT)