Brent hits largest premium to U.S. crude since 2015

By David Gaffen

NEW YORK (Reuters) - U.S. crude oil futures recovered some losses on Thursday after a larger-than-expected decline in inventories, but U.S. futures remained under pressure in comparison to global Brent crude, which rallied to push the spread between the two to the highest level in more than three years.

U.S. oil inventories fell by 3.6 million barrels in the week to May 25, the U.S. 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 U.S. futures.

Brent crude was still higher, as the prospect that OPEC will bring its supply-cut deal to a close by the end of the year has had a greater effect on the U.S. benchmark due to ongoing worries about U.S. infrastructure constraints.

"Domestic production keeps rising, but it may have reached a point where increasing amounts of barrels of crude oil are becoming stranded," said John Kilduff, a partner at Again Capital LLC in New York.

West Texas futures have been under pressure as U.S. production keeps rising. In the most recent week, it hit 10.8 million bpd, a new weekly record, though those figures are less reliable than lagging monthly figures.

Brent crude futures for August rose 46 cents on the day to $78.25 a barrel, while U.S. West Texas Intermediate crude was down 60 cents to $67.59 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 U.S. 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 the Organization of the Petroleum Exporting Countries and its non-OPEC 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 barrels per day (bpd) to compensate for losses in supply from Venezuela and to address concerns about the impact of U.S. 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 U.S.," Hansen said.

Prices for physical barrels of U.S. light sweet crude delivered at Midland are at their largest discount to the benchmark U.S. futures price in almost four years. Concerns about U.S. bottlenecks are contributing to the decline in U.S. futures as well.

(Reporting by Will Dunham)