Oil futures headed lower Wednesday, pulling back a day after settling at their highest since March, pressured by an unexpected weekly climb in U.S. crude stockpiles, as rising tensions between the U.S. and China raised the potential for a decline in energy demand.
The Energy Information Administration reported Wednesday that U.S. crude inventories rose by 4.9 million barrels for the week ended July 17. That compared with an average forecast by analysts polled by S&P Global Platts for a decline of 1.9 million barrels. The American Petroleum Institute on Tuesday reported a climb of 7.5 million barrels.
The weekly increase in U.S. supplies may raise questions over a decision by the Organization of the Petroleum Exporting Countries and their allies earlier this month to taper production cuts from 9.7 million barrels per day to 7.7 million barrels starting from August, Lukman Otunuga, senior research analyst at FXTM, told MarketWatch. “Given the state of the global economy and rising coronavirus cases in the United States, oil remains exposed to downside risks.”
On Wednesday, September WTI crude, which is now the front month contract after the August contract expired Tuesday, was down 57 cents, or 1.3%, at $41.35 a barrel on New York Mercantile Exchange after posting a gain of 2.4% on Tuesday.
September Brent crude on ICE Futures Europe gave up 42 cents, or 1%, $43.90 a barrel, following a 2.4% gain in the previous session.
The EIA data also showed crude stocks at the Cushing, Oklahoma, storage hub edged up by about 1.4 million barrels, while total domestic oil production climbed by 100,000 barrels to 11.1 million barrels a day last week.
Gasoline supply fell by 1.8 million barrels, while distillate stockpiles climbed by 1.1 million barrels, according to the EIA. The S&P Global Platts survey had shown expectations for a supply decline of 2 million barrels for gasoline and an inventory increase of 280,000 barrels for distillates.
On Nymex, August gasoline rose by 0.2% to $1.2821 a gallon, but August heating oil fell 1% to $1.2679 a gallon.
August natural gas traded at $1.655 per million British thermal units, down 1.2%, ahead of Thursday’s EIA update on supplies of the commodity.
Both WTI and Brent crude finished Tuesday at their highest settlements since early March after the European Union reached a deal on a budget agreement and coronavirus recovery fund, raising expectations for an improvement in energy demand.
Naeem Aslam, chief market analyst at AvaTrade, said that the resurgence in the price of oil recently could foster more supplies that could eventually prove problematic to the bullish uptrend for crude.
“On the supply side, you also need to be cautious because higher oil prices are likely to bring more oil on the market because the U.S. shale oil production becomes profitable,” he wrote in a daily note.
Commodity investors were watching Sino-American relations after China’s Foreign Ministry said the U.S. had instructed China to close its consulate in Houston, highlighting simmering tensions between Beijing and Washington that could be viewed as harmful to crude values. China is one of the biggest importers of oil.
“Crude prices extended their slide after the China consulate action delivered a strong wave of risk aversion across all asset classes,” said Edward Moya, senior market analyst at Oanda. “The crude demand rebound will struggle since U.S.-Chinese tensions are not going away anytime soon.”
Still, “a complete divorce between the world’s two largest economies seems unlikely so the global demand outlook for crude might not get completely derailed here,” he added.