Oil Rally Under Pressure; Record Saudi Output Offsets U.S. Drawdown
Oil's near week-long rally was under pressure on Wednesday after an unexpected drawdown in U.S. crude and gasoline stocks was offset by worries that Saudi Arabia was cranking output to record highs even as OPEC talked of ways to ease a global glut.
U.S. West Texas Intermediate (WTI) crude futures were down 5 cents at $46.53 a barrel by 1:03 p.m. EDT (1703 GMT), after trading as much as 21 cents higher.
Brent crude futures rose by 42 cents to $49.65 a barrel. It reached five-week highs of $49.75 earlier.
WTI's discount to Brent
Oil rallied about 11 percent over the past four sessions since Saudi Arabia, the kingpin in the Organization of the Petroleum Exporting Countries, stoked speculation the group was ready to reach an output freeze agreement with non-OPEC producers.
The markets briefly extended gains after the U.S. Energy Information Administration (EIA) said domestic crude inventories fell 2.5 million barrels last week, surprising analysts who had expected a build of 522,000 barrels.
Gasoline stockpiles also fell 2.7 million barrels, more than expectations for a 1.6 million-barrel drop, the EIA data showed.
But the market's upside was capped by a Reuters report that said Saudi Arabia could boost crude output in August to new records at 10.8-10.9 million bpd, overtaking Russia's production, even as OPEC aims for a pact to curb global output.
The Saudis told OPEC they pumped 10.67 million bpd in July, versus their previous record of 10.56 million in June 2015.
Saudi-based industry sources said earlier in the year they expected the kingdom's output to edge near record highs to meet summer demand for power. But they said it was unlikely that Saudi output will flood the market.
"One certain thing to be aware of is the Reuters report that Saudis may increase production to new record highs pushing near 11 million barrels per day," said Tariq Zahir, trader in crude oil spreads at Tyche Capital Advisors in New York.
"With the U.S. rig count coming back online for several weeks, even if a freeze did happen we would be talking about freezing at higher levels of output," Zahir said.
Before last week's drawdown, U.S. crude stockpiles had risen unexpectedly in three previous weeks. The U.S. oil drilling rig count has also risen without pause for seven weeks, signaling more production ahead.
Reports of refinery outages in the United States, including a crude unit at Exxon Mobil Corp's 502,500 barrel per day (bpd) plant at Baton Rouge in Louisiana, added to the market's downside.
Traders will be on the lookout for a U.S. Federal Reserve statement due at 2:00 p.m. (1800 GMT) to gauge if interest rates are to rise soon.
(By Barani Krishnan; Additional reporting by Amanda Cooper in LONDON and Henning Gloystein in SINGAPORE; editing by Jason Neely and Marguerita Choy)