US oil fell nearly 2 percent on Thursday, despite a larger-than-expected decline in US crude inventories, while global benchmark Brent was little changed, pushing the spread between the two to its widest in more than three years. US crude stockpiles fell 3.6 million barrels last week, the Energy Information Administration said, exceeding expectations for a decline of 525,000 barrels. Gasoline and diesel stocks rose, but the crude drawdown was a salve for recent losses in US futures.
Brent crude losses were more limited, as the prospect that the Organization of the Petroleum Exporting Countries will bring its supply-cut deal to a close by the end of the year has had a greater effect on the US benchmark due to ongoing worries about US infrastructure constraints.
"The market is concerned that in the longer term increases in oil production combined with refining problems and limited outbound pipeline capacity," said Andrew Lipow, president of Lipow Oil Associates in Houston.
US crude production has been rising to record high levels since late last year. In March, it jumped 215,000 bpd to 10.47 million bpd, a new monthly record, the EIA said on Thursday.
Brent crude futures for August ended down 14 cents to $77.56 a barrel, while US West Texas Intermediate July crude settled $1.17, or 1.7 percent, lower at $67.04 a barrel. At one point, the premium for Brent over WTI surpassed $11 a barrel, the largest spread since March 2015. That spread has doubled in less than a month, as a lack of pipeline capacity in the United States has trapped a lot of output inland.
"The Brent/WTI is blowing out. I think there must be what looks like some capitulation going on in the spread between those two contracts," Saxo Bank senior manager Ole Hansen said. The wider premium makes US crude exports more competitive than those linked to the Brent price, such as North Sea or West African grades of oil.
Brent had hit a three-week low below $75 a barrel on Monday after OPEC and its allies, including Russia, indicated they could adjust their deal to curb supplies and increase production.
OPEC and non-OPEC producers have committed to cut output by 1.8 million bpd until the end of 2018 but are ready to make gradual supply adjustments to deal with shortages, a Gulf source familiar with Saudi thinking told Reuters late on Wednesday. That news helped boost Brent as it suggests a slightly less committal approach to adding barrels to the market.
Sources told Reuters last week that Saudi Arabia, the effective leader of OPEC, and Russia were discussing boosting output by about 1 million bpd to compensate for losses in supply from Venezuela and to address concerns about the impact of US sanctions on Iranian output.
"The fact that we saw the Saudi/Russia announcement last week could have attracted some interest in narrowing the spread, given that we were looking for some of the geopolitical risk (in Brent) to be removed, but that's been overtaken by the domestic widening in crude prices in the US," Hansen said.
Prices for physical barrels of US light sweet crude delivered at Midland are at their largest discount to the benchmark US futures price in almost four years. Concerns about US bottlenecks are contributing to the decline in US futures as well.