Oil falls on shock U.S. stock builds, OPEC supply worries

NEW YORK (Reuters) - Oil benchmarks fell on Wednesday after an unexpected build in U.S. crude and gasoline inventories despite strong demand, and as traders weighed a possible increase in OPEC crude output to cover any shortfalls in supply from Iran and Venezuela.

A general view of the Ceylon Petroleum Corporation's (CPS) Sapugaskanda Oil Refinery in Colombo, Sri Lanka May 11, 2018. REUTERS/Dinuka Liyanawatte

U.S. crude inventories rose 5.8 million barrels last week, while gasoline stocks increased by 1.9 million barrels, the Energy Information Administration said. [EIA/S]

“Normally, you don’t see builds at this time of year. With Memorial Day Weekend and summer driving season coming up, we were expecting a draw. And getting a build - and such a large build, was surprising,” said Tariq Zahir, managing member at Tyche Capital Advisors.

Brent crude LCOc1 futures slipped 23 cents to settle at $79.80 a barrel, while U.S. crude CLc1 lost 36 cents to $71.84 a barrel.

“A 5.8 million-barrel build is kind of like a slap in the face, where it’s like, ‘Where did this oil come from?’ And as you look through the numbers, it doesn’t make a lot of sense,” said Phil Flynn, analyst at Price Futures Group in Chicago. “It is definitely a shock to the system.”

The increase in U.S. inventories came from a combination of reduced exports and rising imports. The latter is somewhat surprising, Flynn said, because Brent crude is trading at more than a $7 premium to U.S. crude WTCLc1-LCOc1, making exports more attractive.

Indeed, Sinopec 600028.SS, Asia's largest refiner, will boost U.S. crude oil imports to an all-time high as China tries to reduce its trade deficit with the United States, two sources with knowledge of the matter said.

Oil prices have gained nearly 20 percent this year, driven primarily by coordinated supply cuts by the Organization of the Petroleum Exporting Countries (OPEC) and partners including Russia.

OPEC may decide to raise oil output as soon as June as Venezuelan output collapses, U.S. sanctions against Iran loom, and after Washington raised concerns that the oil rally was going too far, OPEC and oil industry sources familiar with the discussions told Reuters. “It does seem like any move above $80 attracts selling interest right now and that could potentially lead us to a period of consolidation, where I think $77.50 or even $75 might be in focus,” Saxo Bank senior manager Ole Hansen said.

Prices have also been affected by rising geopolitical tensions that could dent global output just as demand is set to hit 100 million barrels per day in the final quarter of this year, according to the International Energy Agency.

Additional reporting by David Gaffen and Stephanie Kelly in New York, Amanda Cooper in London, Naveen Thukral and Jessica Jaganathan in Singapore; Editing by Richard Chang and Alistair Bell