Oil Falls as U.S. Production Rises

By Sarah McFarlane Features Dow Jones Newswires

Oil prices nudged higher Wednesday, with Brent underpinned by a supply disruption in the North Sea, which is expected to trigger further reductions in global oil inventories.

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Brent crude, the global oil benchmark, rose 0.9% to $63.90 a barrel on London's ICE Futures exchange. On the New York Mercantile Exchange, West Texas Intermediate futures were trading up 0.7% at $57.54 a barrel.

Around 450,000 barrels a day of North Sea output is shut off for the coming couple of weeks due to a leak in the Forties Pipeline System, according to Ineos, a privately held chemical company.

Bjarne Schieldrop, chief commodity analyst at SEB Markets said the pipeline issue highlights the aging infrastructure which needs maintenance and money.

"It was highly unexpected to see this kind of hairline crack in the pipeline in the first place, which raises the concern that is there more to be found along the same pipeline?," he said.

The North Sea issue exacerbated the already historically wide spread between Brent and WTI. U.S. oil prices are being kept in check by rising shale production.

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The U.S. Energy Information Administration on Tuesday raised its forecast for U.S. 2018 production to average above 10 million barrels a day, compared with 9.2 million barrels a day in 2017 and exceeding the previous record of 9.6 million barrels a day set in 1970.

The move "generated additional downside pressure," Commerzbank said in a note.

Investors are also monitoring the deteriorating financial situation in Venezuela, which has the world's largest oil reserves.

"At the moment they are doing nothing, which means that there is no money for maintenance, there is no money for additional drilling, and it's basically a standstill and production is ticking lower," Mr. Schieldrop said.

Venezuelan oil production has fallen below 2 million barrels a day this year to its lowest level in decades.

Nymex reformulated gasoline blendstock -- the benchmark gasoline contract -- rose 0.6% to $1.71 a gallon. ICE gas oil changed hands at $572.25 a metric ton, up 50 cents from the previous settlement.

Write to Sarah McFarlane at sarah.mcfarlane@wsj.com

Oil prices slid for a second day Wednesday after U.S. data showed that fuel inventories rose and production increased.

And Brent prices fell as concerns eased about the impact of the shutdown of a major pipeline system in the North Sea.

U.S. crude futures fell 54 cents, or 0.95%, to $56.60 a barrel on the New York Mercantile Exchange. Brent, the global benchmark, fell 90 cents, or 1.42%, to $62.44 a barrel on ICE Futures Europe.

Crude oil stockpiles fell by 5.1 million barrels last week. Analysts attributed that to strong demand from refiners, but a lot of the gasoline they churned out didn't end up being consumed. Gasoline inventories climbed by 5.7 million barrels last week.

"There's a concern that drops in crude stocks are being put into fuel [storage] tanks. That doesn't make a real picture for strong demand," said Gene McGillian, research manager at Tradition Energy.

Fuel prices fell sharply. Gasoline futures fell 5.09 cents, or 3%, to $1.6467 a gallon. Diesel futures fell 2.92 cents, or 1.51%, to $1.9044 a gallon.

Also weighing on prices, U.S. crude output rose by 73 million barrels a day to 9.78 million barrels a day -- a fresh weekly record -- raising the prospect that shale producers will offset extended production cuts by the Organization of the Petroleum Exporting Countries and other major producers. Output has increased for eight weeks in a row.

"The big picture is that U.S. oil production is at record levels and growth is showing few signs of slowing," analysts at Capital Economics wrote.

That might be scaring bullish investors out of the market, said Tariq Zahir, managing member of Tyche Capital Advisors. Investors built up record net long positions in oil contracts in recent weeks in the run-up to the decision by OPEC and its partners to continue cutting output through the end of next year.

"With U.S. production going up again, stubbornly, is that going to affect OPEC members going forward?" Mr. Zahir said. "Some weak longs may be getting out."

Oil prices, particularly the Brent benchmark, jolted higher earlier this week after Ineos, a chemical company, announced that it was shutting down its Forties Pipeline System for a few weeks to repair a leak. That will stop the flow of some 450,000 barrels a day of North Sea oil output, forcing producers to shut in production.

But Brent prices have fallen after briefly surging above $65 a barrel Tuesday as investors took profits and concerns about the duration and impact of the outage eased. Brent prices have fallen 3.48% over the past two sessions -- their largest two day decline since July 5.

Analysts at Société Générale said Wednesday that despite the disruption to the Forties system, there is still plenty of oil available.

"Our view is that further upside due to this event is limited; from current price levels, we believe the downside is bigger. The bottom line is that we would currently be a seller, not a buyer, of Brent," the analysts wrote.

Write to Alison Sider at alison.sider@wsj.com and Sarah McFarlane at sarah.mcfarlane@wsj.com

(END) Dow Jones Newswires

December 13, 2017 15:28 ET (20:28 GMT)