Oil set for weekly loss as huge supplies cut short rally

[NEW YORK] Oil prices fell to below US$40 a barrel on Thursday, on track to their first weekly loss in over a month, pressured by record high US stockpiles, weakening equity markets and a strong dollar.

With crude futures losing as much as 6 per cent since Tuesday's settlement - their biggest slide in two days since mid-February - analysts said the oil rally of the past five weeks that brought prices up from mid-US$20 levels may be unravelling.

US government data on Wednesday showed crude stockpiles jumped 9.4 million barrels last week - three times more than forecast by analysts in a Reuters poll.

A senior executive from the International Energy Agency, meanwhile, said a deal among a few Opec producers and Russia to freeze production was likely to be "meaningless" as Saudi Arabia was the only one with the ability to raise output.

Brent crude's front-month contact was down 61 cents, or 1.5 per cent, at US$39.86 a barrel by 11:08 a.m. EST (1508 GMT). It was on track to a 3 per cent drop on the week, its biggest weekly slide since mid-January.

US crude's front-month fell 90 cents to US$38.89. For the week, it was poised to lose about 2 per cent, its first weekly loss since mid-February.

Earlier this week, both the benchmarks were up more than 50 per cent from multi-year lows hit in January. "A dose of reality (has) derailed the current perception (of a) rally, at least for the time being," said Dominick Chirichella, analyst at New York's Energy Management Institute.

The market will look out for a weekly reading on the US oil drilling rig count due after 1:00 p.m. EST. A production indicator, the rig count rose last week after 12 weeks of cuts.

Shares on Wall Street, trading in tandem with crude most of this year, headed for their first weekly drop in six weeks. Financial markets were broadly risk averse with volumes thin ahead of the Good Friday and Easter break.

The dollar's first weekly gain since late February also made oil and other commodities denominated in the greenback less affordable to holders of the euro and other currencies.

Trading houses were betting on oil being oversupplied at least two more years, while Russia looked to export more crude to Europe in April than any month since 2013.

Scott Shelton, energy broker at ICAP in Durham, North Carolina, feared of big builds in US distillates, which include heating oil and diesel, as refineries emerge from maintenance. "We need to export large quantities of distillate,"he said. "Production has not fallen enough."

REUTERS