Oil prices steady but oversupply a concern

US oil production is at record levels and producer costs appear to be declining, with no output scale-back anticipated

Oil prices fell four percent on Wednesday, with US crude hitting a six and a half year low, after a huge unexpected stockpile build in the United States reinforced concern about a growing global oil glut and predictions of even lower prices.

US crude inventories rose by 2.6 million barrels last week to 456.21 million, the government's Energy Information Administration said.

The figures stunned energy market analysts on Wall Street, as well as traders and investors who had been expecting a stockpile drawdown despite the peak US summer driving season nearing its end and refinery problems cutting fuel processing capabilities.

As late as Tuesday, the American Petroleum Institute, an industry group, forecast a 2.3 million barrel drawdown for the week to August 14. A Reuters poll of analysts on Tuesday had predicted a more conservative stockpile drop of 800,000 barrels.

"The numbers were a total surprise with crude showing a build when the whole Street was forecasting a draw," Tariq Zahir, managing member at Tyche Capital Advisors in Laurel Hollow in New York, said.

"We feel these numbers are not factored in to the current price of spot crude."

The front-month futures contract in US crude, which expires on Thursday, was down $1.80, or 4 per cent, at $40.82 a barrel by 11:49 a.m. EDT (1549 GMT). It had tumbled earlier to $40.60, its lowest since March 2009.

The front-month in Brent, the global benchmark for oil, was down $1.75, or 3.5 per cent, at $47.06 a barrel.

BP's Whiting, Indiana, refinery, the largest in the Midwest, shut down its biggest crude unit unexpectedly at the start of the week covered by the data. Refinery utilization in the US Midwest region fell to 92.2 per cent, the biggest weekly drop in eight months.

Gasoline futures fell even more than crude, tumbling 5 per cent to a six-month low, despite stockpiles of the fuel falling 2.7 million barrels, compared with the 1.6-million barrel drop expected by analysts in the Reuters poll.

Diesel lost three per cent, hitting six-year lows.

Oil has lost about a third of its value since June, driven by global oversupply and record stockpile levels.

"This week's EIA data reaffirms the bearish fundamentals that continue to mount," said Chris Jarvis, analyst at Caprock Risk Management in Frederick, Maryland. "Couple that with the stronger dollar and weakness out of China and it's a recipe for lower prices ahead for crude," Jarvis said.