Oil Prices Lower on Oversupply Concerns

Deep ocean oil rig FBN

Oil prices were lower Wednesday but briefly spiked to gains with opinions divided about the influence of bloated stockpiles.

Prices rose after new U.S. government data showed stockpiles are draining. Crude stockpiles fell by 933,000 barrels in the week ended Friday and gasoline stockpiles fell by 2.6 million barrels, far beyond estimates of a 200,000-barrel draw, according to the U.S. Energy Information Administration.

But prices retreated into negative territory with many convinced the drawdowns aren't enough to dent a glut of crude that has weighed on oil markets for two years. Many traders note stockpiles grew by 525,000 barrels at the key crude delivery hub of Cushing, Okla., and anticipate that inventories will be growing again in the weeks to come, said Donald Morton, senior vice president at Herbert J. Sims & Co., who runs an energy-trading desk.

"This just continues more of the same saga," Mr. Morton said. "You have a bear cycle setting in, and this data that came in today is not enough to change that thinking."

U.S. crude for July delivery recently fell 7 cents, or 0.1%, to $48.42 a barrel on the New York Mercantile Exchange. Brent, the global benchmark, fell 31 cents, or 0.6%, to $49.52 a barrel on ICE Futures Europe.

The market has been taking sharp losses since Friday when oil-field services company Baker Hughes Inc. said the number of rigs drilling for oil in the U.S. rose for a second-straight week. On Monday and Tuesday, data provider Genscape and the industry group American Petroleum Institute also suggested stockpiles are growing.

API estimated a 1.2-million-barrel increase in the week ended Friday, which set the market up to rebound after EIA showed a decline instead. But traders and analysts are looking at a broad set of factors that could make that rebound temporary.

On Wednesday analysts at Goldman Sachs Group Inc. called the recent recovery in oil "fragile." Prices had been up as much as 95% in four months as of last week, boosted in large part by fires in Canada and strife in Africa that has shut down oil production and pipelines. But that may not be enough to ultimately drain stockpiles that grew to historic heights in recent years.

"Outside of these disruptions, the rationalization of the oil market's surplus remains nascent at best," the Goldman analysts said in a note.

Canadian production is already restarting and other major exporters keep producing more than expected, they added. And the recent rise in prices -- from below $30 a barrel all the way back up above $50 -- makes it likely that production cuts will fall short of expectations, especially in the U.S., they added.

There would have to be further disruptions, maybe in Nigeria or Venezuela, to move U.S. prices sustainably above $49 a barrel in the next three months, the bank said. The market's current path is likely to bring a surplus back by early 2017.

That has been a widespread concern as many shale-drilling oil companies in the U.S. have lowered costs and showed a willingness to drill more wells at current prices. Apache Corp., for example, based its budget this year on U.S. oil prices of $35 a barrel, so it is "not unreasonable" to think the company could add five rigs in the Permian basin with oil now near $50, analysts at Piper Jaffray Cos.' Simmons & Co. International said in a note Wednesday.

Geopolitical factors around the world are also blunting the effect of the EIA report, a broker and analysts said. Market volatility has spiked, central banks are meeting this week, the dollar has been on the rise for the better part of a week and the U.K. has a coming referendum on leaving the European Union. That has investors wary and heading to the sidelines. Many have been bullish on oil and closing out means selling, lowering prices, said Scott Shelton, broker at ICAP PLC.

"When you see moves like that, people start taking down risk," he added.

Gasoline futures recently traded down by 1% to $1.506 a gallon. Diesel futures are down 0.7% to $1.4914 a gallon.

By Timothy Puko