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June 6, 2018, 3:08 p.m. EDT

Oil settles at 2-month low as crude supplies rise unexpectedly

EIA reports weekly climb crude stockpiles, jump in gasoline supplies

By Myra P. Saefong and Sara Sjolin, MarketWatch

The Cardon refinery in Venezuela, owned by state oil company PdVSA

Oil prices fell Wednesday, with U.S. benchmark crude logging its lowest finish in about two months after a report revealed a surprise weekly climb in domestic crude inventories.

The rise in crude stocks “was really unexpected,” said Tariq Zahir, managing member at Tyche Capital Advisors LLC. “I can’t stress enough—we are supposed to be drawing [on supplies] at this time of year.”

Prices had traded higher in early dealings, buoyed by reports Venezuela may not deliver some of its contracted crude oil exports on the heels of political upheaval. An economic crisis fed by the nation’s political instability has limited global supply, helping the Organization of the Petroleum Exporting Countries hit its target for reduced output faster than expected.

July West Texas Intermediate crude  fell 79 cents, or 1.2%, to settle at $64.73 a barrel on the New York Mercantile Exchange, for the lowest finish since April 9. Prices gave back the 1.2% rise it saw Tuesday.

On ICE Futures Europe, August Brent crude , the global oil benchmark, shed 2 cents to end at $75.36 a barrel, well above the session’s $74.46 low.

The U.S. Energy Information Administration reported Wednesday that crude supplies climbed by 2.1 million barrels for the week ended June 1. Analysts surveyed by S&P Global Platts had forecast a decline of 1.3 million barrels, while the American Petroleum Institute on Tuesday reported a fall of 2 million barrels, according to sources.

The unexpected crude-supply climb “could be a talking point for OPEC,” and prompt its members to decide against “a million-barrel increase” in production, said Zahir. That being said, “we feel we will see crude continue to be pressured on the surprise increase in inventories and of course the continued increase in U.S. production and U.S. rig counts in the past few weeks.”

The EIA also reported that total domestic crude production rose by 31,000 barrels a day to fresh weekly record of 10.8 million barrels a day.

Gasoline stockpiles jumped by 4.6 million barrels for the week, while distillate stockpiles rose 2.2 million barrels, according to the EIA. The S&P Global Platts survey forecast a supply decline of 600,000 barrels for gasoline, along with a climb of 700,000 barrels for distillates.

Among the oil products, July gasoline  lost 1.7% to $2.07 a gallon, while heating oil for the same month  shed 0.7% to $2.127 a gallon.

July natural gas  gained 0.2% to end at $2.896 per million British thermal units, ahead of the EIA’s weekly update on supplies of the fuel due Thursday.

Meanwhile, Venezuela’s state-owned PdVSA is now reportedly considering declaring force majeure on some contracts with crude oil buyers, essentially declaring they cannot be fulfilled as output from its oil fields has tanked and bottlenecks are slowing down exports at the ports.

“As things stand, the situation is clearly reaching crisis point and has left the embattled Latin American producer staring into the abyss. The endgame for Venezuela’s oil troubles is fast approaching, and when it does, price fireworks will be the order of the day,” said Stephen Brennock, oil analyst at ‎PVM Oil Associates, in a note.

Concerns about the Venezuelan supply drop, and about potential export disruption in Iran, have sparked speculation that oil demand will significantly outstrip supply and create a spike in prices.

The threatened shortfall has added pressure on OPEC and its partners, led by Russia, to increase production targets when they gather for a meeting in Vienna on June 22. In an unusual demand, the U.S. government has reportedly asked OPEC kingpin Saudi Arabia and other cartel members to increase their oil flow by around 1 million barrels a day, to keep a lid on rising oil prices.

Reuters reported in late May that the major oil producers were considering increasing output by 1 million barrels to plug the gap from Venezuela. That sparked a selloff in the oil market, with Brent losing sight of the $80 handle and WTI moving back below $65 a barrel.

However, traders shouldn’t be so discouraged by the prospect of a rise in OPEC production, according to Jeff Currie, head of commodities research at Goldman Sachs.

“Everybody is all bearish about the recent announcement of a million barrels per day extra supply, but the market needed it. It not only needs it, it is mandatory. Otherwise you just drive the bus off a cliff,” he said at the S&P Global Platts’ annual crude oil summit in London Tuesday.

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