Crude futures inched down on Wednesday amid concerns of increased U.S. output next year and ahead of a release of additional data on U.S. inventories.
Brent crude, the global oil benchmark, fell 0.42% to $49.92 a barrel on London's ICE Futures exchange. On the New York Mercantile Exchange, West Texas Intermediate futures were trading down 0.39% at $48.01 a barrel.
The Energy Information Administration on Tuesday said it expects American shale producers to crank out 9.3 million barrels a day in 2017, a slight increase from its projections in May. It also expects 2018 daily output to hit 10 million barrels, exceeding the previous record of 9.6 million barrels a day in 1970.
The agency also bumped up its projections for demand, so overall analysts forecast a more balanced market next year, despite the upward revision in American output.
Still, "sentiment is very negative," said Richard Mallinson, a geopolitical analyst at consultancy Energy Aspects. Investors, many of whom who have been burned by oil's bumpy ride to recovery, are anticipating the official release of stock data from the Department of Energy later on Wednesday.
Despite consistent U.S. crude stock draws over a period of about two months, investors may not be fully reassured that the oil market is rebalancing.
"A lot of the bulls have been hurt by earlier selloffs so there is very little appetites for long positions," said Mr. Mallinson.
Data from the American Petroleum Institute, an industry group, showed a 4.6 million barrel decrease in crude supplies for the last week, but "a steep rise in product stocks, which made the picture somewhat more gloomy, "said Commerzbank in a recent note.
The API projects a 4.1 million barrel increase in gasoline stocks and a 1.8 million barrel increase in distillate inventories.
Oil's depressed outlook is also being affected by the rift between Saudi Arabia and three other Persian Gulf states who, earlier in the week, severed diplomatic ties with Qatar, a member of the Organization of the Petroleum Exporting Countries.
Saudi Arabia and others have long accused Qatar of meddling in their internal affairs and backing terrorism, allegations that Qatar has denied.
Some investors fear the political rift in the Middle East will affect the running of OPEC, which has been struggling to contend with strong production out of the U.S.
The oil cartel banded together with a handful of external producers including Russia to help rebalance the oil market and reduce global output by 1.8 million barrels until March.
More than five months into that deal, much of the benefits from the cuts have flowed to the U.S., where producers take advantage of the higher prices to expand their drilling operations.
U.S. production has stayed above the 9.3 million barrels a day level for four weeks.
OPEC's own rising production also weighed on prices. Despite the reported high level of compliance to the cut deal, the cartel's output likely rose by 270,000 barrels a day in May to 32.12 million, driven by the faster-than-expected rebound in Nigeria and Libya, two OPEC nations exempt from the pact, said S&P Global Platts.
"If global stocks do not start to show demonstrative signs of steady draws, OPEC may have to be more creative with its strategy," said the firm.
Nymex reformulated gasoline blendstock--the benchmark gasoline contract--rose 1.40% to $1.53 a gallon. ICE gasoil changed hands at $435.50 a metric ton, up $6.25 from the previous settlement.
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U.S. oil prices had their worst day since March, falling to their second lowest level of the year after U.S. data showed an unexpected increase in oil stockpiles.
U.S. crude inventories rose by nearly 3.3 million barrels last week, according to the U.S. Energy Information Administration -- the first weekly increase since March 31. Analysts and traders surveyed by The Wall Street Journal were anticipating a 3.5 million barrel decrease in the amount of oil in U.S. storage tanks.
The unexpected buildup of supplies shook an already anxious market. Investors, many of whom have been burned by oil's bumpy ride to recovery, have been watching the U.S. storage figures each week for signs that the glut that has weighed on the market for nearly three years is dissipating.
U.S. crude futures fell $2.47, or 5.1%, to $45.72 a barrel. It was the biggest single day decline since March 8. Brent, the global benchmark, fell $2.06, or 4.1%, to $48.06 -- their lowest level since before the Organization of the Petroleum Exporting Countries and other major producers struck an agreement to cut output in November.
Major selloffs have become a regular feature of the oil market in recent months as traders and investors try to gauge whether OPEC's efforts are working.
Prices have been languishing since OPEC and other major producers, including Russia, said they would extend their pact to reduce output by 1.8 million barrels a day for another nine months, but didn't agree to deeper reductions that many market participants were hoping for. Even the eight consecutive weeks of oil being drained from U.S. storage tanks hasn't been enough to convince increasingly skeptical investors that OPEC's efforts would be enough to bring supplies back into balance with demand.
The unexpected increase in stockpiles spooked many market participants, raising doubts both about OPEC's effectiveness and the strength of U.S. demand for oil and fuel.
"It's continuing to ratchet up fears that 1.8 million barrels over nine months isn't enough to rebalance markets," said Gene McGillian, research manager at Tradition Energy.
The increase in oil stockpiles last week was driven by an uptick in imports, a decrease in exports and a pullback by refiners, which churned less oil into fuel last week.
"It's a crummy report," said John Saucer, vice president of research and analysis at Mobius Risk Group. "It's a divergence from what we've been seeing, and it causes people to regroup and rethink."
Still, some investors said the increase may prove to be an anomaly.
"It does not mean we should dismiss the past six or eight weeks we've been seeing of draws," said Greg Sharenow, portfolio manager at Pacific Investment Management Co. "We could well have to overshoot before we find our footing."
Gasoline stockpiles also grew last week, breaking a four-week streak of declines with a 3.3 million barrel increase. The increase, which comes in the first full week of the summer driving season, is raising fears that demand will be tepid this summer and that U.S. drivers won't be of much help bringing down bloated stocks of oil and fuel.
"This is a pseudo disaster this early in refining season," said Bob Yawger, director of the futures division of Mizuho Securities USA.
If more gasoline is going into storage rather than into vehicles, refiners are likely to continue throttling back, buying less crude oil to make into fuel.
"The whole thing is a vicious cycle that is not really leaving a lot of room for upside," Mr. Yawger said.
Gasoline futures fell 6.32 cents, or 4.1%, to $1.4913 a gallon -- the largest daily decline since September. Diesel futures fell 5 cents, or 3.4%, to $1.416 a gallon.
--Neanda Salvaterra contributed to this article.
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(END) Dow Jones Newswires
June 07, 2017 16:38 ET (20:38 GMT)