Oil drops on inventory jump; demand outlook limits loss

Oil prices dropped for a second day on Wednesday on signs of ample U.S. supplies and expectations of further interest rate hikes, though forecasts of higher 2023 demand growth and a potentially tighter market limited losses.

U.S. crude stocks rose by a more than forecast 10.5 million barrels, according to market sources citing American Petroleum Institute (API) figures ahead of official Energy Information Administration (EIA) data at 1530 GMT.

“Simply put, the U.S. is swimming in oil,” said Stephen Brennock of oil broker PVM.

Brent crude futures fell 59 cents, or 0.7%, to $84.99 a barrel by 1432 GMT after dropping by more than $1 in earlier trading. U.S. West Texas Intermediate (WTI) crude slipped 64 cents, or 0.8%, to $78.42.

U.S. inflation data and remarks by central bank officials that have been perceived as indications that interest rates will go higher for longer also weighed on the market.

Federal Reserve officials on Tuesday said that the U.S. central bank will need to maintain gradual increases to interest rates to beat inflation and suggested that price pressures driven by a hot jobs market could push borrowing costs higher than previously expected.

Also applying downward pressure on crude was the announcement this week that the United States would sell 26 million barrels of oil from the nation’s strategic reserve, which is already at its lowest level in about four decades. Lending some support was Wednesday’s report from the International Energy Agency (IEA), which raised its forecast for 2023 oil demand growth and said that restrained OPEC+ production could bring a supply deficit in the second half.

The IEA said that about 1 million barrels per day (bpd) of production from OPEC+ member Russia will be shut in by the end of the first quarter, citing a European ban on seaborne imports and a G7 price cap over the invasion of Ukraine.

On Tuesday the Organization of the Petroleum Exporting Countries (OPEC) also raised its projection for global oil demand growth and pointed to a tighter market in 2023