Oil prices fall as increased USA drilling points to higher output

US Crude Oil Field Production data by YCharts

Oil prices were firm on Thursday, buoyed by a surprise decline in USA crude inventories as well as ongoing supply cuts led by Opec, although a relentless rise in U.S. oil output threatens to undermine efforts to tighten the market.

The West Texas Intermediate for May delivery jumped 1.63 US dollars to settle at 65.17 dollars a barrel on the New York Mercantile Exchange, while Brent crude for May delivery added 2.03 dollars to close at 69.47 dollars a barrel on the London ICE Futures Exchange. Brent crude futures were at $65.87 per barrel, down 34 cents, or 0.5 percent.

Should the United States reimpose sanctions against Iran, energy consultancy FGE said that would likely result in a 250,000 to 500,000 barrels per day (bpd) drop in its exports by year-end.

On the other hand, Reuters energy markets analyst Amanda Cooper tweeted that the physical oil market was weak, even taking into account seasonal peculiarities. Gasoline production averaged 9.9 million barrels in the week to March 16, with refineries operating at 91.7 percent of capacity and processing 16.8 million barrels of crude daily.

Soaring US output, as well as rising output in Canada and Brazil, is undermining efforts by the Middle East dominated oil cartel Opec to curb supply and bolster prices.

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"We may start to see concerns about a supply glut later in the year if U.S. crude production increases, but at the moment we're not seeing an oversupply", said Mikiko Tate, a senior analyst at Sumitomo Corporation Global Research, said by phone from Tokyo.

Thanks to the high drilling activity, USA crude oil production has risen by more than a fifth since mid-2016, to 10.38 million barrels per day (bpd), pushing it past top exporter Saudi Arabia.

USA drillers added four oil rigs in the week to March 16, bringing the total count to 800, the weekly Baker Hughes drilling report said on Friday. Total volume traded was about 23% below the 100-day average.

"U.S. bank Goldman Sachs said Opec was "likely to overshoot on the inventory rebalancing", and as a result, it saw Brent reaching $82.50 per barrel by mid-year". Analysts had forecast a gain of 3.25 million barrels, and only two of the 12 analysts had expected a decline of a lesser magnitude. The producer group is said to be discussing changes to the way it measures the impact of production cuts.

Distillate stockpiles, which include diesel and heating oil, fell 2.0 million barrels, versus expectations for a 1.7 million barrels drop, the EIA data showed. One of the options is looking at the past seven years of inventories in OECD countries, instead of five years.

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