Why oil prices will remain weak

Right on cue, USA crude oil inventories fell last week, but the decline was less than expected, according to the weekly inventories report from the Energy Information Administration.

The American Petroleum Institute published industry reports on US energy levels, finding crude oil stockpiles increased by 2.8 million barrels and gasoline stockpiles increased by 1.8 million barrels last week.

US crude stockpiles dropped by 1.66 million barrels last week, the EIA reported Wednesday.

However, gasoline stocks USOILG=ECI rose 2.1 million barrels, compared with analysts' expectations in a Reuters poll for a 457,000-barrel drop.

After rising for three consecutive days, U.S. West Texas Intermediate crude futures fell $1.73, or 3.7 percent, to settle at $44.73 per barrel, its lowest close since November 14.

Oil prices threatened to fall through key technical levels on Wednesday after the government issued a bearish report on US fuel stockpiles.

Despite almost six months of OPEC-led efforts to reduce a global glut, oil prices have not stabilized at higher levels as many had anticipated when the group agreed with other producers to cut supply back.

That decline pushed both contracts to their lowest since May 5, driving them into technically oversold territory.

The weakness on the supply side was driven by non-OPEC production which fell by 0.8 Mb/d, its largest decline for nearly 25 years, said the report.

While this would not affect global inventories, restricting the amount of oil coming into the U.S. should theoretically bring down inventories in the much-watched market, if it weren't for Iraq's increased oil exports to the US.

The International Energy Agency says it expects oil supplies next year to outpace demand despite consumption hitting 100 million bpd for the first time.

They remained roughly 13% below, when producers led by the OPEC extended a pledge to cut manufacturing by 1.8 million bpd by an extra nine months until the end of the 1st quarter of 2018.

But adherence to the cuts is under scrutiny and the producer group said this week that its output rose by 336,000 bpd in May to 32.14 million bpd. However, continuing production growth in many non-OPEC countries is expected to moderate the pace of global liquid fuels inventory draws in 2017. Accordingly, higher shale oil supplies will weigh on prices.

Efforts to combat the oil glut have not been helped by figures this week that showed Opec as a whole increased production in May because of higher output by Nigeria and Libya, which are not covered by the recent cuts deal. All these data dampened sentiment and led to a sharp fall in crude oil prices. More than half this growth will come from the US, which the IEA expects to increase production by 430,000 B/D in 2017 and 780,000 B/D in 2018.

Some traders still hope that Wednesday's readings from the USA government will show declining inventories for oil and gasoline, as numbers from the Energy Information Administration don't always match those from the API.



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