Oil Drops as Traders Assess Surprise Stockpile Build in the U.S.

(Bloomberg) -- Oil dropped after an industry report showed a surprise U.S. crude build.

Futures in New York edged lower on Tuesday after the American Petroleum Institute was said to report U.S. crude inventories rose 4.85 million barrels last week. Analysts surveyed by Bloomberg were predicting a 2-million-barrel decline. The API also showed an increase in Cushing, Oklahoma, crude supplies.

“It’s definitely a surprise build,” said James Williams, president of London, Arkansas-based energy researcher WTRG Economics. A crude build combined with a rise in Cushing stockpiles in the Energy Information Administration report would likely “increase the contango between the first and second month” contracts.

Front-month WTI crude closed at a 6-cent discount to second-month futures, the most in more than three weeks, indicating market weakness.

Earlier in the session, traders focused on the widening gap between the U.S. and global benchmarks. A strengthening dollar and faltering equities weakened U.S. oil’s appeal, while its global counterpart remained supported by geopolitical risks.

A large number of drilled-but-uncompleted wells in shale plays and the potential for rising output have weighed on American prices, said Walter Zimmermann, chief technical analyst at ICAP-TA. “You are probably seeing some serious producer hedging into these lofty levels here, whereas I don’t see anybody keen to hedge against Brent given these geopolitical fears.”

Crude has rallied following U.S. President Donald Trump’s withdrawal from the 2015 Iran nuclear accord and the re-imposition of sanctions. The key question now is whether other major crude producers will ramp up output to fill any gaps in Iranian exports.

“Because crude oil tends to peak on Mideast fears in the spring, and because of this dramatic blow-out of the WTI-Brent spread and because the stock market looks so dicey here, there are a list of reasons why any further upside will be unsustainable,” said Zimmermann.

West Texas Intermediate for June delivery traded at $70.92 a barrel at 4:42 p.m. after settling at $71.31 a barrel on the New York Mercantile Exchange. Total volume traded Tuesday was about 47 percent above the 100-day average.

For a look at a sign the market may be switching gears, click here

Brent for July settlement rose 20 cents to end the session at $78.43 a barrel on the London-based ICE Futures Europe exchange. The global benchmark crude traded at a $7.06 premium to WTI for delivery in the same month.

The Bloomberg Dollar Spot Index climbed as much as 0.9 percent. At the same time, the S&P 500 Index broke a four-session rally, declining as much as 1 percent.

Meanwhile, Venezuela’s economic collapse continued to imperil output from the nation that’s home to the world’s largest tranche of reserves. Oil production in the Latin American country sank to 1.505 million barrels a day last month, down 31 percent from April 2017, according to data supplied by the country to OPEC.

For the latest story on Venezuela’s oil industry woes, click here.

ConocoPhillips is asking courts from London to Hong Kong to help it recover about $2 billion it’s owed by Venezuela’s state-owned oil giant. Conoco is trying to collect after an international tribunal last month ordered Venezuela to compensate the American driller for the 2007 nationalization of oil fields in the Latin American nation.

The API also reported U.S. gasoline stockpiles fell by 3.37 million barrels last week. That would be the largest draw since late March if Energy Information Administration data confirms it on Wednesday. Cushing, Oklahoma stockpiles rose for a fourth week if EIA data confirms it.

Other oil-market news:

• Gasoline futures rose 0.2 percent to $2.2048 a gallon, the highest since October 2014.
• North Dakota March oil output was 1.162 million barrels a day in March versus 1.175 million a day in February, according to preliminary data from N.D. Pipeline Authority.
• The Environmental Protection Agency plans to ask for advice on whether -- and how -- to boost the transparency of an opaque $9 billion market in biofuel compliance credits amid allegations of manipulation, said two people familiar with the move.

--With assistance from Tsuyoshi Inajima Grant Smith and Lucia Kassai

To contact the reporter on this story: Jessica Summers in New York at jsummers24@bloomberg.net.

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

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