Oil prices fall on big build in U.S. gasoline, distillate stocks

By David Gaffen

NEW YORK (Reuters) - Oil prices slipped on Thursday after a surprisingly large increase in U.S. inventories of gasoline and distillates, slamming the brakes on an early rally on news that Saudi Arabia had started talks with customers about reducing crude sales.

U.S. crude stocks fell sharply to end the year, the Energy Information Administration said, with a draw of 7 million barrels, but stocks of gasoline and distillates surged as refiners ramped up production to reduce crude inventories, a typical year-end practice to avoid higher taxes.

Refining runs increased sharply, particularly on the U.S. Gulf Coast, the main refining hub in the United States. While end-year refinery activity tends to increase, this was larger than expected.

"The magnitude of the products changes were much larger than expected and overwhelming somewhat supportive crude data," said Scott Shelton, energy specialist at ICAP in Durham, North Carolina.

The big boost in product inventories was seen as bearish, wiping out a rally that had pushed U.S. crude prices to a high of $54.12 on the day, and dropped U.S. gasoline margins to two-week lows.

As of 11:42 a.m. ET (1642 GMT), West Texas Intermediate crude was down 24 cents, or 0.5 percent, to $53.02 a barrel. Brent crude was off 20 cents, or 0.4 percent, to $56.30 a barrel, after hitting a high of $57.35 earlier in the session.

Oil has rallied 23 percent since mid-November and speculators have jumped on the bandwagon, loading up on long positions in crude futures in recent weeks in anticipation of OPEC's supply cuts. U.S. government data showed futures speculators as of last week had a bigger net long position in U.S. crude than at any time since mid-2014.

Some analysts suggested the rally could fizzle out soon, particularly if the Organization of the Petroleum Exporting Countries struggles to meet expected production cuts.

"I figure there's going to be some sort of correction that sticks with the market soon," said Carl Larry, principal consultant at Frost & Sullivan, adding he believes the market is too confident in OPEC's ability to stick with its agreed-upon cuts.

OPEC promised in November to cut output to boost prices. Saudi Arabia, the world's largest crude producer, plans to clip daily output by 486,000 bpd.

OPEC output in December was substantially higher than the level from where it agreed to lower output by 1.2 million barrels a day, according to a Reuters survey. That could make it harder to reach its target.

Overall output dipped to 34.2 million barrels a day from 34.4 bpd in November, still 1.7 million barrels more a day than OPEC's 32.5 million/bpd target.

(Additional reporting by Henning Gloystein in Singapore; Editing by Dale Hudson and David Gregorio)