Oil Falls Below $44 as Report of Supply Build Stuns Market

(Bloomberg) -- Oil pared the longest run of gains in a month as an industry report is said to show an unexpected increase in crude and gasoline inventories.

Futures fell below $44, plunging almost 70 cents from their closing price in New York on Tuesday, after the American Petroleum Institute was said to report that crude inventories rose by 851,000 barrels last week while analysts predicted a decline. Gasoline supplies increased 1.35 million barrels, according to people familiar with the API data.

"The market’s reacting because they’re stunned," said Phil Flynn, senior market analyst at Price Futures Group Inc. in Chicago. "They were blindsided by this report."

Oil tumbled into a bear market last week on concerns that expanding production from places like the U.S. and Libya will counter output cuts from the Organization of Petroleum Exporting Countries and partners including Russia. The strong bearish mood is unusual for the month of June, when refineries typically process more crude to meet rising demand during the summer driving season. While U.S. stockpiles have fallen by 26 million barrels since March, they remain 100 million above the five-year average and drillers have added rigs for the longest stretch in at least three decades.

U.S. crude stockpiles peaked at 535.5 million barrels in the week ended March 31, according to EIA data. While inventories have steadily declined since then, American oil production has climbed above 9.3 million barrels a day to the highest level since August 2015. At the same time, high gasoline inventories amid weak summer demand remain a concern. Supplies fell last week after two weeks of builds.

The API numbers contrast with expectations for the report that the Energy Information Administration will release Wednesday. Analysts in a Bloomberg survey forecast a 2 million-barrel drop in crude stockpiles data from the EIA.

"If we get another sizable draw-down this week, that could be supportive," John Kilduff, a partner at Again Capital LLC, a New York-based hedge fund, said before the API release. "We’ve got some very important weekly inventory numbers coming up."

See also: Oil’s record bearish bets signal short-covering

West Texas Intermediate for August delivery settled 86 cents higher at $44.24 a barrel on the New York Mercantile Exchange. It dipped as low as $43.55 after the API release and traded at $43.71 as of 4:43 p.m. Prices are down nearly 10 percent for the month, the worst June performance in almost 30 years.

Brent for August settlement rose 82 cents to $46.65 a barrel on the London-based ICE Futures Europe exchange, priced at a $2.41 premium to WTI. It traded at $46.19 in late trading. The global benchmark is down 7.2 percent this month.

Adding to the tensions in the Middle East, the U.S. said it suspects Syrian forces are planning another chemical-weapons attack. Meanwhile, cyberattacks across Europe have been hitting major companies including Russian oil producer Rosneft PJSC and ship operator A.P. Moller-Maersk in Copenhagen.

The increase in bearish bets on crude signals prices are vulnerable to a sharp, sudden rebound, investors and analysts have said. Short positions in Brent, the global benchmark, rose to the highest since 2011 last week.

Oil-market news:

• The Permian Basin, spanning Texas and New Mexico, has at least 25 more years to go before its oil gushers start dwindling, and producers will be able to make money even if crude falls to the mid-$20s, according to Scott Sheffield, chairman of Pioneer Natural Resources Co.
• Oil prices are probably near the bottom, but “badly damaged sentiment and a rising rig count will dent recovery,” Citigroup Inc. analysts wrote in a report on Monday.

--With assistance from Ben Sharples and Grant Smith

To contact the reporter on this story: Meenal Vamburkar in New York at mvamburkar@bloomberg.net.

To contact the editors responsible for this story: Reg Gale at rgale5@bloomberg.net, Carlos Caminada