Oil hits one-month low after US inventory build

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NEW YORK: Oil prices fell to a one-month low on Wednesday, after United States (US) data showed an unexpected build in refined products, fanning fears of oversupply headed into the slow demand season and offsetting a bounce after the largest British pipeline shut for the second time in three months.

Brent crude futures LCOc1 fell $1.25, or 1.8 per cent, to $65.63 a barrel by 12:19 p.m. EST (1719 GMT), while US West Texas Intermediate (WTI) crude CLc1 dropped $1.57, or 2.5 per cent, to $61.82 a barrel. US crude hit a low of $61.62, the lowest level since January 8.

US crude inventories USOILC=ECI rose 1.9 million barrels last week, compared with analysts’ expectations for an increase of 3.2 million barrels, the US Energy Information Administration’s (EIA) data showed on Wednesday. Refining runs notched a surprising rise in the week, boosting inventories of distillates such as diesel and jet fuel, as well as gasoline.

The rebound in refining runs was largely due to more activity in the US Gulf and the Midwest, and that helped restrain crude inventories while stocks of finished products grew more than expected.

“The report was squarely bearish with the across-the-board inventory rise. The ability of crude oil inventories to rise in the face of a snap back higher in refinery utilisation was particularly bearish,” said John Kilduff a partner at energy hedge fund Again Capital LLC in New York.

The market had briefly recovered after Ineos, which owns the Forties Pipeline, the largest in the United Kingdom, said the line was down after a feed control valve shut, with no clear timeline for restart.

The Forties Pipeline shut for more about three weeks in December after a crack developed in the line. That line pumps 450,000 barrels of oil per day, and its role as a supply source for Britain means it can have a notable effect on oil prices.

The US inventory build and the Forties line shutdown had an immediate effect on the WTI/Brent spread WTCLc1-LCOc1, which widened by 41 cents to $4.16 a barrel.

EIA data also showed that US crude production also rose to 10.25 million bpd last week, which would be a record if matched by monthly figures. The government’s monthly data is considered more reliable than the weekly figures, but it lags by a couple of months; the most recent monthly data released showed production rose to 10.038 million bpd in November, just shy of the 1970 record of 10.044 million bpd.

Rising US oil production C-OUT-T-EIA has been looming over the market, with output up by 1 million bpd in the last year to about 10 million bpd.

The EIA expects US output to reach an average of 10.59 million bpd in 2018 and 11.18 million bpd by 2019, accelerating earlier estimates. That should continue to drive US exports, pinching OPEC efforts to reduce supply, and puts the US in line to potentially overtake Russia as the world’s largest producer.

The Organisation of the Petroleum Exporting Countries and other producers, including Russia, have cut production since January 2017 to force down global inventories.

The futures market is in backwardation where prompt prices for oil are above those for future delivery, suggesting investors are counting on demand outpacing supply. However, front-month contracts fell more rapidly on Wednesday than further-dated futures, suggesting a slightly less favourable view of supply and demand dynamics than before the EIA data.