Oil Slips as Expectations Hold for Lingering Oversupply

Oil prices fell as much as 3 percent on Wednesday after U.S. stockpiles hit record highs, and analysts and traders said the market could shed more of the rebound seen over the past two weeks due to expectations of lower output.

U.S. crude stocks rose almost 5 million barrels last week to reach nearly 418 million barrels, the highest since record keeping began in 1982, government data showed. Analysts polled by Reuters had forecast a build of nearly 4 million barrels. [EIA/S]

The record inventory was a sign that the market was still struggling to find a home for some 2 million barrels per day of oil. The glut has prevented prices from forming a bottom to a selloff that began last summer, analysts said.

"It proves that the price retracement we had on the capital expenditure cuts and falling rig counts may have been premature," said Gene McGillian, senior analyst at Tradition Energy in Stamford, Connecticut.

Energy firms slashed billions of dollars from their oil exploration budgets, and the number of U.S. oil drilling rigs fell to three-year lows after crude prices fell to half their June peaks.

On Wednesday, benchmark Brent oil <LCOc1> fell below the $55-a barrel-support, settling down $1.77, or 3 percent, at $54.83. U.S. crude <CLc1> closed down $1.18, or about 2 percent, at $49.07.

After a 60 percent rout over the past seven months on worries of a global supply glut, oil prices have risen in five of the last nine sessions, due mostly to what traders say is short-covering.

The gain, of roughly 10 percent, has led some to think the market is on to track to a larger rebound. Kuwaiti Oil Minister Ali al-Omair believes crude will hit $60 a barrel by year-end.

The International Energy Agency, however, sees a price well below the $100 level of the last three years.

"If a rally takes hold, it will be sold into," said Tariq Zahir, managing partner at Tyche Capital Advisors in Laurel Hollow, New York.

As proof of the market's near-term weakness, the "contango", or discount, between U.S. crude for prompt delivery and a year ahead <CLc1-CLc12> widened on Wednesday to $11 a barrel, its biggest in a week.

Investment bank Goldman Sachs, one of the oil market's most influential voices, reiterated its view that lower prices were needed over the coming quarters to force a slowdown in the U.S. crude output that led to the global glut.

(By Barani Krishnan; Additional reporting by Robert Gibbons in New York, Jack Stubbs in London, Meeyoung Cho in Seoul and Adam Rose in Beijing; Editing by Ruth Pitchford, Louise Heavens, Chris Reese, Tom Brown and Jonathan Oatis)