Oil settles at two-week low on surprise U.S. fuel stock rise

NEW YORK (Reuters) - U.S. crude on Wednesday slid nearly 3 percent on Wednesday, its biggest daily decline in more than two months, after a sharp rise in U.S. inventories of refined fuel suggested demand may be flagging, while U.S. crude production hit another weekly record.

A worker prepares to label barrels of lubricant oil at the state oil company Pertamina's lubricant production facility in Cilacap, Central Java, Indonesia November 6, 2017 in this photo taken by Antara Foto. Picture taken November 6, 2017. Antara Foto/Rosa Panggabean/ via REUTERS

U.S. gasoline stocks rose by 6.8 million barrels and distillate inventories were up 1.7 million barrels, government data showed, both exceeding expectations in a Reuters poll. The surprise data hit prices of both crude and products in a market that was tilted bullish and vulnerable to a selloff, analysts said.

The Energy Information Administration data also showed U.S. crude stocks fell 5.6 million barrels, more than expected. That was partially due to closure of the Keystone pipeline after a leak in South Dakota in mid-November, which cut flows to Cushing, Oklahoma. That line reopened Tuesday.

U.S. West Texas Intermediate crude futures CLc1 settled down $1.66, or 2.9 percent, to $55.96 a barrel. It marks the lowest close for the benchmark since Nov. 16 and the biggest one-day decline for WTI since Oct. 6.

Brent crude futures LCOc1 ended down 2.6 percent, or $1.64 a barrel to $61.22, for its lowest close since Nov. 2.

Gasoline stocks tend to build in December, but at 221 million barrels of inventory, stocks are slightly above the five-year average for this time of year.

“Gasoline inventories are also now building as demand eases back even in the face of decent export numbers. Gasoline futures have clearly broken technical support levels and ULSD (diesel) futures are testing them,” said David Thompson, executive vice-president at Powerhouse, an energy-specialized commodities broker in Washington.

Gasoline futures led the energy complex lower on Wednesday, as RBOB RBc1 dropped 3 percent to $1.6658 a gallon. Heating oil HOc1, a proxy for diesel, lost 2.6 percent to $1.8650 a gallon.

U.S. crude production rose to 9.7 million barrels per day, another weekly record, though short of all-time records reached in the 1970s. That increase may undermine efforts by the Organization of the Petroleum Exporting Countries, Russia and other producers to cut supply. Those cuts, which were extended at a meeting last week for the whole of 2018, have helped lift Brent prices more than 40 percent since June.

Prices have slipped from November’s peak, which represented two-year highs.

“The sentiment-driven support to crude oil prices has somewhat dissipated as market participants look beyond last week’s OPEC meeting,” said Abhishek Kumar, senior energy analyst at Interfax Energy’s Global Gas Analytics in London.

Russian Oil Minister Alexander Novak said it was too early to talk about exiting the OPEC agreement, and that the process would be gradual. Analysts such as Goldman Sachs have said that the expected rise in demand in 2018 would mostly be offset by U.S. and Canadian supply growth.

U.S. oil production C-OUT-T-EIA has climbed by 15 percent since mid-2016 to 9.7 million bpd, close to levels of top producers Russia and Saudi Arabia.

“With U.S. production, we’re still in the throes of seeing that go ever higher. There’s only going to be more production coming which is very problematic for OPEC non-OPEC deal adherence,” said John Kilduff, partner at Again Capital in New York.

Additional reporting by Devika Krishna Kumar, Scott DiSavino and Julia Simon in New York; Henning Gloystein and Keith Wallis in Singapore; Editing by Marguerita Choy and David Gregorio