Oil sinks on shock US inventories, IEA says global oil glut won't subside in 2017

A worker walks past a pump jack on an oil field owned by Bashneft in Bashkortostan, Russia.
A worker walks past a pump jack on an oil field owned by Bashneft in Bashkortostan, Russia. PHOTO: REUTERS

NEW YORK (REUTERS) - Oil prices sank more than 3 percent to their lowest in more than five weeks on Wednesday (June 14) following US data showing an unexpectedly large weekly build in US gasoline inventories and International Energy Agency (IEA) data projecting a big increase in non-Opec output in 2018.

The increase in US gasoline inventories drove down RBOB futures by more than 4 per cent, tugging Brent and US crude futures lower with them, analysts said.

"The industry continues to turn a crude oil surplus into a gasoline and distillate product surplus," Andrew Lipow, president of Lipow Oil Associates in Houston said.

After rising for three consecutive days, Brent futures were down US$1.81, or 3.7 per cent, at US$46.91 by 12:44pm EDT (1644 GMT). U.S. West Texas Intermediate crude was down US$1.75, or 3.8 per cent, at US$44.71 per barrel.

Both contracts hit their lowest since May 5, driving them into technically oversold territory.

The US Energy Information Administration (EIA) said gasoline inventories increased by 2.1 million barrels during the week ended June 9, while crude inventories decreased by 1.7 million barrels.

That compares with analysts estimates in a Reuters poll for a 0.5 million barrel draw in gasoline stocks and a 2.7 million barrel draw in crude inventories.

Opec and other exporters such as Russia have agreed to keep production almost 1.8 million barrels per day (bpd) below the levels pumped at the end of last year and not to increase output until the end of the first quarter of 2018.

But adherence to the cuts is under scrutiny and the producer group said this week its output rose by 336,000 bpd in May to 32.14 million bpd.

Oil inventories are near record highs in some parts of the world, and producers outside the Opec deal are increasing output.

The IEA said in a separate report earlier on Wednesday it expected growth in non-Opec supply to outpace demand growth next year.

"Our first outlook for 2018 makes sobering reading for those producers looking to restrain supply," the IEA said in its monthly oil market report.

A rapid rise in US shale oil output will contribute to the increase in non-Opec supply next year, the IEA said.

"The outlook for oil hinges on the effectiveness of the Opec cuts relative to the supply increases from US shale," said William O'Loughlin, analyst at Australia's Rivkin Securities.

Global demand continues to grow, but not by enough to get rid of the glut.

Demand grew 1 per cent in 2016, roughly in line with the previous two years, but well below the 10-year average of 1.8 per cent, BP said in its benchmark Statistical Review of World Energy on Tuesday.