Oil prices tumbled 2 percent on Wednesday, hitting two-month lows, after a surprise build in U.S. crude and gasoline inventories despite the peak summer driving season as refiners cut production amid faltering demand and profits.
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The U.S. Energy Information Administration (EIA) said crude stockpiles rose 1.7 million barrels last week, instead of falling 2.3 million barrels as forecast, while gasoline inventories rose 452,000 barrels, compared with analysts' expectations for a 40,000-barrel increase.
Brent was down $1.14, or 2.5 percent, at $43.73 a barrel by 12:31 a.m. EDT (1631 GMT) after hitting $43.62 earlier, its lowest since May 10.
U.S. West Texas Intermediate (WTI) crude fell $1 cents, or 2.4 percent, to $42.92 a barrel. The session low was $41.87, the lowest since April 20.
Both benchmarks inched closer to their 200-day moving average, which if breached, could result in further drops, traders said.
"The bottom line is the street has gotten it wrong are far as the oil markets achieving supply-demand balance this year," said Tariq Zahir, crude trader and portfolio manager at Tyche Capital Advisors in New York.
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"We will likely break through the $40 levels in days and weeks to come."
The EIA reported refinery crude runs fell 277,000 barrels per day last week as utilization rates fell 0.8 percentage point to 92.4 percent of capacity.
"A drop in refinery runs at the peak of summer driving season indicate refiners are dialing back amid faltering profit margins," said Matt Smith, analyst at New York-based oil cargoes tracker Clipperdata.
On Tuesday, the largest independent U.S. refiner Valero Energy Corp said it expected lower refinery utilization over the rest of the year to counter slumping margins caused by record supplies of gasoline and diesel. BP's refining margins hit a six-year low in the second quarter and the oil major said margins would remain under significant pressure in the coming months.
Oil prices are still up more than 60 percent from 12-year lows of $26-$27 in the first quarter. But the rally has faded since breaching $50 in May, amid worries oil may be headed again for a glut like that which forced prices off from highs above $100 in mid-2014.
Some market participants think the glut concerns are exaggerated.
"I think we will stay between $40 and $45," said Salvatore Recco, who helps oversee about $2 billion of client money, including in oil, at Gravity Investments in Denver, Colorado. "We'd only tell our customers to worry about the oil outlook when the central banks issue a serious downgrade to the economic outlook."
Traders will be on the lookout for the U.S. Federal Reserve's latest monetary policy announcement at 2:00 p.m. EDT (1800 GMT). Speculation that the Fed will keep interest rates unchanged helped pared early gains in the dollar that had also pressured oil. (By Barani Krishnan; Additional reporting by Karolin Schaps in LONDON, Stine Jacobsen in OSLO and Henning Gloystein in SINGAPORE; Editing by David Goodman and Marguerita Choy)