Oil Pares Gains on Expectations of Rising U.S. Crude Supplies

(Bloomberg) -- Oil pared gains as expectations for a build in U.S. crude and gasoline inventories offset supply disruptions from Tropical Storm Zeta.

Futures in New York retreated below $39 a barrel after the industry-funded American Petroleum Institute reported a 4.58-million-barrel build in U.S. crude inventories last week, according to people familiar. The report also showed gasoline stockpiles rose by more than 2 million barrels.

Prices strengthened earlier as Zeta spurred U.S. Gulf producers to shut in 49.5% of oil output. The storm is expected to regain strength as it heads toward an anticipated landfall in Louisiana late Wednesday. At the same time, the Bloomberg Dollar Spot Index fell as much as 0.3%, boosting the appeal of commodities priced in the U.S. currency.

The API report confirms “demand destruction linked to Covid-19,” said Tom Finlon of GF International. “The price reaction is substantial, but so is the drop in demand.”

Despite the crude and gasoline builds in the API report, the figures showed distillate supplies falling 5.3 million barrels last week. If confirmed by a U.S. government report Wednesday, that would be the sixth straight weekly decline in distillate inventories.

Prices are testing the lower end of their recent trading range as Libya continues to ramp up output. Oil production at Libya’s El Feel field is said to have climbed to 75,000 barrels a day, after a force majeure was lifted on Monday. Despite an improvement in consumption in Asia, a renewed surge in virus cases across the U.S. and Europe is raising concerns the fragile recovery in demand will be derailed.

“Now that we’re seeing lockdowns starting to happen in Europe, the demand for jet fuel is just going to continue to fall going into the winter season,” said Tariq Zahir, managing member of the global macro program at Tyche Capital Advisors LLC. “With Libya output coming back, that’s adding more oil to the market that’s not needed.”

Though front-month futures prices were higher on Tuesday, the market’s underlying structure has softened. Brent’s nearest timespread widened to its deepest contango in two weeks, pointing to growing concerns about oversupply as Libyan oil returns.

“It’s very difficult to predict what is going to happen with oil and gas right now,” Murray Auchincloss, chief financial officer of BP Plc, said in an interview following the company’s earnings report. “We’ve seen continuous reduction in inventory levels since June, and when those move toward the five-year average I suspect there will be an uptick in price.”

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