Oil retreats from 17-month high after reported US supply gain

[NEW YORK] Oil retreated from the highest close in 17 months after the American Petroleum Institute was said to report that US crude inventories climbed last week.

Futures slipped from the settlement after the 4.68 million-barrel increase said to be reported by the industry-funded API. Analysts surveyed by Bloomberg News are projecting that Energy Information Administration data Wednesday will show a stockpile gain. Prices rose earlier after the International Energy Agency said that the global oil glut will disappear and the market will become under-supplied in the first half of 2017 as cuts by Opec and other producers are felt.

"Reality keeps interfering with expectations," Michael Lynch, president of Strategic Energy & Economic Research in Winchester, Massachusetts, said by telephone. "Apparently, the oil producers in the US aren't cooperating with Opec."

Oil has risen about 17 per cent since the Organization of Petroleum Exporting Countries agreed Nov 30 to trim output for the first time in eight years. The subsequent deal reached last weekend with non-members encompasses countries that produce about 60 per cent of the world's crude. The price rally has led to predictions of a production revival in the US, where shale output from seven fields may increase next month, a report showed.

West Texas Intermediate for January delivery slipped 31 US cents to US$52.52 a barrel at 4:54pm on the New York Mercantile Exchange. It settled earlier at US$52.98, the highest settlement since July 14, 2015. Total volume traded was about 28 per cent above the 100-day average at 4:55pm

Brent for February settlement was down 41 US cents at US$55.28 a barrel on the London-based ICE Futures Europe exchange. The contract closed at US$55.72, also the highest level since July 2015.

"I think US$50 to US$60 crude is here to stay," Rob Thummel, a managing director and portfolio manager at Tortoise Capital Advisors LLC in Leawood, Kansas, who helps manage US$15.5 billion, said by telephone. "It's a sweet spot that will lead to adequate rates of demand growth while spurring enough production."

US crude inventories probably shrank by 1.5 million barrels last week for a fourth straight decline, according to the Bloomberg survey before an Energy Information Administration report on Wednesday. Supplies remain at the highest seasonal level in weekly data compiled by the EIA since 1982.

The Federal Reserve began a two-day policy meeting Tuesday that's projected to result in an interest rate hike Wednesday. "All of the markets are focused on the Fed right now," John Kilduff, a partner at Again Capital LLC, a New York-based hedge fund that focuses on energy, said by telephone. "There are doubts about how closely Opec will adhere to its targets. History doesn't favour them when it comes to this matter."

Global oil stockpiles will decline by about 600,000 barrels a day in the next six months as curbs by Opec and its partners take effect, said the IEA, which had previously assumed inventories wouldn't drop until the end of 2017.

"These cuts move the market from surplus into deficit," Andrew Slaughter, executive director at the Deloitte Center for Energy Solutions in Houston, said by telephone. "These cuts will eat into the inventory overhang. How fast this happens depends on how much of a cut Opec delivers."

Saudi Arabia is largely sparing Asia from cuts in crude sales amid the threat of more US and European supply entering the market.

The kingdom was said to be supplying one European refiner with 20 per cent less crude in January, according to a person with direct knowledge of the matter.

Iraq's State Oil Marketing Co will soon notify customers of reduced sales volumes planned for January, according to a person familiar with the matter.

BLOOMBERG