Oil jumps on drop in U.S. petroleum stocks, possible OPEC cut extension

By David Gaffen

NEW YORK (Reuters) - Oil prices rose more than 3.5 percent on Wednesday, bolstered by the biggest one-week drop in U.S. inventories so far this year, and after Iraq and Algeria joined Saudi Arabia in supporting an extension to OPEC supply cuts.

Concerns about rising output from the United States, Libya and Nigeria still pressured prices, however. Some analysts questioned whether the staying power of the sharp price rebound after the U.S. Energy Information Administration said crude inventories fell 5.2 million barrels last week, much more than the 1.8 million-barrel slide analysts predicted.

Gasoline and distillate stocks also fell, supporting a market that has sold off in recent weeks due to persistently high U.S. inventories. [EIA/S]

Global benchmark Brent crude was up $1.81 at $50.54 a barrel by 1:51 p.m. Eastern time (1751 GMT). U.S. light crude oil was $1.81 higher at $47.69 a barrel.

"U.S. crude oil production is now solidly above 9.3 million barrels per day with more to come, and refined product, especially for gasoline, is oddly weak," said John Kilduff, partner at hedge fund Again Capital in New York.

"It is difficult to see how the day's gains last."

Brent and U.S. crude futures contracts closed on Tuesday at their second lowest levels since Nov. 29, the day before OPEC announced it would cut output in the first half of 2017.

Prices surged after that deal, but have come under pressure in recent weeks as U.S. production has climbed, undermining OPEC-led efforts to reduce a global crude glut.

Also supporting prices were comments from Algeria's energy minister that Algeria and Iraq favour extending global supply cuts when OPEC meets this month.

On Monday, Saudi Arabia's oil minister Khalid al-Falih said he expected the output deal to be extended to the end of the year or possibly longer.

State-owned Saudi Aramco will reduce oil supplies to Asian customers by about 7 million barrels in June, a source told Reuters, as part of the Organization of the Petroleum Exporting Countries' deal to reduce production.

"Without an extension of the quotas with continued high compliance, inventories can't be normalized," said analysts at DrillingInfo.com, in a note.

Aramco had previously maintained supplies to important Asian customers.

Questions remain about the effectiveness of OPEC-led cuts. OPEC member Libya said its production exceeded 800,000 barrels per day (bpd) for the first time since 2014 and could rise to 1.2 million bpd later this year.

Nigeria, which along with Libya is exempt from OPEC cuts, is also expected to see a jump in output soon as Shell tests the Trans Forcados oil export pipeline before it restarts.

(Additional reporting by Aaron Sheldrick in Tokyo; Editing by Chris Reese and David Gregorio)