OPEC's simple problem. Despite Saudi cuts, it's shipping more oil: Russell

Oil prices fell on Wednesday after industry data showed a build in usa crude stocks and OPEC reported a rise in its production despite a pledge to cut output.

Reports of an increase in OPEC's output by 335,000 barrels per day (bpd), due to increases by Nigeria and Libya, both of which are exempt from production cuts is invalidating the efforts of Saudi Arabia to balance the markets.

The IEA said in a separate report earlier Wednesday it expected growth in non-OPEC supply to outpace demand growth next year.

Crude futures had shed more than 40 cents in the first few hours of trading Wednesday in Asia, in response to a build in USA crude and gasoline inventories reported by the American Petroleum Institute for the week ended June 9.

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Oil inventories in developed nations remain higher than before OPEC started cutting production. Traders will be watching figures on last week's US stockpiles to be released later on Tuesday by industry group the American Petroleum Institute.

The last time this happened, in mid-2014, it was a precursor to a massive selloff in oil that dropped Brent from US$108 a barrel to about US$47 a barrel in the span of five months.

Crude stocks at the Cushing, Okla., delivery hub fell by 1.2 million bbl, EIA said.

A day after OPEC complained that increased output in the United States was slowing efforts to rebalance supply and demand in the oil market, the IEA also suggested that the dynamism of United States producers could prove a headache for exporters.

Michael Tran, director of global energy strategy at RBC Capital Markets, says prices are too low now for producers to lock in large volumes of future production, and pent-up demand for hedging will pressure any moves higher in the oil market.

The IEA has revised its forecast upwards for USA oil production this year, and said Brazil and Canada were also expected "to make further gains".

Prices are close to the "valley" the market saw in February at $2.26 a gallon, which was the lowest so far this year, he said.

Although the IEA said it expected demand to pick up in the second half of this year and to grow further next year, it said it also expects supply to continue to be robust even if Opec and the 11 non-Opec countries supporting its output restraint deal maintain a high level of compliance with the cuts. The majority of non-OPEC countries registered substantial declines in their 2016 average crude production, as compared to 2015.

Indeed, the U.S. Energy Information Administration reports that shale production will jump again in July by 127,000 bpd to 5.5 million bpd, with the biggest gains coming from the Permian basin in west Texas.

  • Eleanor Harrison