Oil prices fell in trading on Thursday despite larger-than-expected declines in US crude stocks.  Rising US production has increased the discount between Brent and WTI to over $10/barrel. Apache photo.

US oil prices down just under 2 per cent

Oil prices fell in trading on Thursday, despite data from the US Energy Information Administration showing a larger-than-expected decline in US crude stocks.

By 2:47 p.m., EDT, benchmark Brent crude was down 12 cents to $77.60/barrel and US West Texas Intermediate fell $1.20 to $67.01/barrel.  The Canadian Crude Index fell $1.85 to $40.22/barrel.

At one point during the session, the discount between Brent and US WTI hit the highest level in over three years.

The US Energy Information Administration reported US crude stocks fell by 3.6 million barrels in the week ending May 25.  Analysts had expected a drop of 525,000 barrels.  Meanwhile, gasoline and diesel stockpiles rose.

Rising US production is causing bottlenecks in US pipeline infrastructure.  “Domestic production keeps rising, but it may have reached a point where increasing amounts of barrels of crude oil are becoming stranded,” John Kilduff, a partner at Again Capital LLC told Reuters.

As a result of increased US output, WTI futures are under pressure.  The EIA reported US oil production hit a record high 10.47 million barrels per day (b/d) in March.

Brent crude futures for August rose 46 cents on the day to $78.25 and US WTI crude dropped 60 cents to $67.59/barrel.

At one point during the session, the WTI discount to Brent topped $11/barrel.  This is the largest premium spread between Brent and WTI since March 2015.  In less than a month, the discount has doubled, mostly due to insufficient pipeline capacity in the US trapping production 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 told Reuters.

The discount works for buyers as US crude is now much cheaper than those linked to Brent, including North Sea or West African grades of oil.

Oil prices have been reeling since OPEC and Russia announced they may adjust the cartel’s supply cut agreement to compensate for falling Venezuelan production and US sanctions on Iranian crude exports.

The deal is set to expire at the end of 2018, however, pact kingpins Saudi Arabia and Russia say they are prepared to make gradual adjustments to manage expected crude supply shortages, according to a Reuters’ Gulf source.

The news, suggesting a slightly less committal approach to adding crude to the market, helped boost Brent prices.

Russia and Saudi Arabia are considering boosting output amongst pact participants by 1 million b/d.  In recent months, Venezuela’s crude output dropped by about 1 million b/d due to social and economic crises plaguing the South American country.

“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 U.S.”, said Ole Hansen.

Prices for physical barrels of US light sweet crude delivered at Midland are now at the highest discount to benchmark US futures prices in almost four years.  Pipeline bottlenecks are blamed for the drop in US futures.