Oil Drops as U.S. Inventories Build Up

By Stephanie Yang and Christopher Alessi Features Dow Jones Newswires

Oil prices fell on Wednesday, as inventory data showed an increase in crude stockpiles and growing U.S. production.

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Light, sweet crude for December delivery lost 32 cents, or 0.6%, to $55.38 a barrel on the New York Mercantile Exchange, on track to close at a one-week low. Brent, the global benchmark, fell 32 cents, or 0.5%, to $61.89 a barrel.

On Wednesday, the U.S. Energy Information Administration reported that crude inventories rose by 1.9 million barrels in the week ended Nov. 10, a surprise build compared with analyst forecasts on average. Traders and analysts surveyed by The Wall Street Journal expected crude stockpiles to decline by 1.4 million barrels last week.

The second consecutive week of rising stockpiles highlighted concerns that as oil has rallied, U.S. shale producers have increased output to take advantage of the higher prices. According to the EIA, domestic production rose to a record weekly high last week of 9.645 million barrels.

"The biggest factor is U.S. oil production," said Kyle Cooper, a consultant at ION Energy Group. "It's not a surprise to anybody, but it is a reality."

The threat of higher shale production kept a lid on oil prices for much of 2017, but investors have recently become more optimistic on the market, as global and U.S. inventory levels have come down, and geopolitical risks added some supply uncertainty to a seemingly tighter market.

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"That can only encourage more and more U.S. production coming on board," said Tariq Zahir, managing member of Tyche Capital Advisors. "As we go into next year I think that will be the biggest problem coupled with the exit strategy from OPEC."

The perception that the Organization of the Petroleum Exporting Countries will extend a deal limiting oil production through March 2018 has also helped support oil prices over the past few months.

OPEC and some major producers outside the cartel, including Russia, first agreed late last year to cap their production at around 1.8 million barrels a day lower than peak October 2016 levels, with the aim of alleviating global oversupply and boosting prices.

OPEC and other deal participants are set to convene in nearly two weeks in Vienna to assess the progress of the deal and debate a possible extension through the end of next year after the deal expires in March.

Also on Tuesday, the International Energy Agency cut its global oil demand forecast for this year and next by 100,000 barrels a day. The agency now expects demand to grow by 1.5 million barrels a day this year and 1.3 million barrels a day next year.

Weaker seasonal demand should take a toll on oil prices as well, said Michael Loewen, a strategist at Scotiabank, who sees oil prices retreating back toward $50 a barrel.

The EIA reported that gasoline stockpiles unexpectedly rose by 900,000 barrels last week, and distillate inventories fell by 800,000, more than analysts had predicted.

Gasoline futures fell 0.6% to $1.7511 a gallon and diesel futures rose 0.2% to $1.9116 a gallon.

Write to Stephanie Yang at stephanie.yang@wsj.com and Christopher Alessi at christopher.alessi@wsj.com

Oil prices fell on Wednesday, as increasing crude stockpiles and record high U.S. production reignited worries about an oversupplied market.

Light, sweet crude for December delivery lost 37 cents, or 0.7%, to $55.33 a barrel on the New York Mercantile Exchange, closing near a two-week low. Brent, the global benchmark, fell 34 cents, or 0.5%, to $61.87 a barrel.

On Wednesday, the U.S. Energy Information Administration reported that crude inventories rose by 1.9 million barrels in the week ended Nov. 10, a surprise build compared with analyst forecasts. Traders and analysts surveyed by The Wall Street Journal expected crude stockpiles to decline by 1.4 million barrels on average last week.

The second consecutive week of rising stockpiles highlighted concerns that as oil has rallied, U.S. shale producers have increased output to take advantage of the higher prices. According to the EIA, domestic production rose to a record weekly high last week of 9.645 million barrels.

"The biggest factor is U.S. oil production hit a new record this week," said Kyle Cooper, a consultant at ION Energy Group. "It's not a surprise to anybody, but it is a reality."

The threat of higher shale production kept a lid on oil prices for much of 2017, but investors have recently become more optimistic on the market. Global and U.S. inventory levels have come down, and geopolitical risks have added supply uncertainty to a seemingly tighter market.

Hedge funds and other speculative investors are more bullish than they've been in more than six months, according to data from the Commodity Futures Trading Commission. As of Nov. 7, long positions in crude oil outnumbered short positions by 317,806 contracts, the highest since April 18.

As prices rise, "that can only encourage more and more U.S. production coming on board," said Tariq Zahir, managing member of Tyche Capital Advisors. "As we go into next year I think that will be the biggest problem coupled with the exit strategy from OPEC."

The perception that the Organization of the Petroleum Exporting Countries will extend a deal limiting oil production through March 2018 has helped support oil prices over the past few months.

OPEC, along with several other major producers including Russia, first agreed a year ago to reduce production by 1.8 million barrels a day from peak October 2016 levels, with the aim of alleviating global oversupply and boosting prices.

The deal participants are set to convene in Vienna on Nov. 30 to assess the progress of the deal and debate the possibility of an extension. Traders said the rise in oil prices likely already reflects the belief that OPEC will take further action to curb supply at the meeting.

Demand prospects have also dimmed this week, further weighing on the market. On Tuesday, the International Energy Agency cut its global oil demand forecast for both 2017 and 2018 by 100,000 barrels a day. The agency now expects demand to grow by 1.5 million barrels a day this year and 1.3 million barrels a day next year.

Weaker seasonal demand should take a toll on oil prices, pushing the U.S. market back toward $50 a barrel, said Michael Loewen, a strategist at Scotiabank. This "is likely to once again result in builds in broader petroleum inventories," Mr. Loewen wrote on Tuesday.

The EIA reported that gasoline stockpiles unexpectedly rose by 900,000 barrels last week, and distillate inventories fell by 800,000, more than analysts had predicted.

Gasoline futures fell 1.3% to $1.7388 a gallon and diesel futures rose 0.1% to $1.9087 a gallon.

--Christopher Alessi contributed to this article.

Write to Stephanie Yang at stephanie.yang@wsj.com

(END) Dow Jones Newswires

November 15, 2017 15:57 ET (20:57 GMT)