Oil dropped more than 2 percent to below $71 a barrel on Wednesday, after government data showed larger-than-expected builds in US refined products. US crude for January delivery dropped $1.78 to $70.84 a barrel by 1:19 pm EST (1819 GMT). London Brent crude fell $2.44 to $72.75.
"The size of the product build was surprising and somewhat bearish and that is weighing on crude right now," said Stephen Schork, editor of the Schork Report in Villanova, Pennsylvania. Distillate inventories, which include heating oil and diesel, had a surprise build of 1.6 million barrels to 167.3 million barrels, contrary to forecasts for a fall of 600,000 barrels, according to the US Energy Information Administration.
Gasoline stockpiles were up 2.2 million barrels at 216.3 million barrels, above analysts' projections of a 1.5 million barrel build. Meanwhile, US crude stockpiles had a surprise draw of 3.8 million barrels to 336.1 million barrels, against expectations for a 600,000 barrel build. The EIA said weekly crude stocks at Cushing, Oklahoma, the delivery point for NYMEX crude oil futures, were up by 2.5 million barrels, at 33.4 million barrels.
Rising stocks at Cushing over the last month have been helping to deepen the discount for prompt oil below forward prices, in what traders call a contango. Losses over the last five days have been partly driven by a recovery in the dollar. Oil is priced in dollars so a rise in the currency makes fuel more expensive to most consumers outside the United States. However, the dollar index against major currencies was down around 0.1 percent by early afternoon.
"You're seeing the selling snowball and without the support of strong equity prices and a weak dollar,... the fundamental picture is regaining control of the market," Gene McGillian, analyst at Tradition Energy in Stamford, Connecticut. The oil market received some support on Wednesday from comments by two oil ministers, who said the Organisation of the Petroleum Exporting Countries should not raise its oil output targets when it meets later this month.
The group, which pumps more than a third of the world's oil, meets in the Angolan capital of Luanda on December 22 and many Opec ministers see the current oil price range of $70-$80 as fair. "The market is reasonably stable, so no, I don't think so," Nigeria's minister of state for petroleum, Odein Ajumogobia, said on the sidelines of a meeting of gas exporting nations when asked if Opec needed to pump more oil.