US oil closes below $40 on big stockpile build

Oil prices were down more than 3 percent on Wednesday after the U.S. government reported a crude build three times above analysts expectations.

The increase marked the sixth straight week of record high inventories, rekindling worries of a glut that threatened to reverse a two-month long rally on the market.

The Energy Information Administration reported U.S. crude stocks rose by 9.4 million barrels in the previous week to a record total of 532.5 million barrels.

The U.S. Energy Information Administration (EIA) said crude stockpiles rose 9.4 million barrels last week, not far from the 8.8 million build indicated by industry group American Petroleum Institute on Tuesday but way off the 3.1 million barrels expected by analysts in a Reuters poll.

"The data will do little to help oil bulls, given the monster build for crude inventories already at record high levels prior to this," said Chris Jarvis, analyst at Caprock Risk Management in Frederick, Maryland.

U.S. crude futures settled $1.66 lower, or 4 percent, at $39.79 a barrel, recording its biggest daily loss since Feb. 11. Brent crude was down $1.25 a barrel at $40.53.

Weaker U.S. equity markets, which have since the start of this year traded in tandem with oil, also weighed on oil, along with a stronger dollar that made commodities denominated in the greenback less affordable to holders of currencies such as the euro.

Crude prices had rallied about 50 percent over the past six months from 12-year lows, lifting U.S. crude from around $26 and Brent from around $27.

While some of the gains were related to declining U.S. oil production and strong demand for gasoline this year, the bulk of it was due to plans by OPEC and other major producers to freeze production at January's high levels.

The EIA data was not entirely bearish, with gasoline stocks falling 4.6 million barrels, compared with the 1.5 million-barrel drop forecast. Demand for the motor fuel over the past four weeks also soared 7 percent year-on-year.

Crude stockpiles at the Cushing, Oklahoma, delivery hub - an important data point for the market - fell 1.3 million barrels, declining for the first time in seven weeks.

But overall focus remained on total crude stockpiles which hit record highs for a sixth straight week at 532.5 million barrels.

"The rally, in our opinion, has run its course for now and opportunities lay ahead for weakness especially in the spread market," said Tariq Zahir, trader and fund manager at Tyche Capital Advisors in New York.

Oil prices had rebounded on supply disruptions from Nigeria and Iraq and on discussions over a proposed output freeze by members and non-members of the Organization of the Petroleum Exporting Countries.

The possible deal to stabilize production was snubbed as "meaningless" by the head of the International Energy Agency's oil industry and markets division, Neil Atkinson, on Wednesday.

"Amongst the group of countries (potentially participating) that we're aware of, only Saudi Arabia has any ability to increase its production," Atkinson said. "So a freeze on production is perhaps rather meaningless. It's more some kind of gesture which perhaps is aimed ... to build confidence that there will be stability in oil prices."

Qatar has invited all 13 OPEC members to Doha on April 17 for another round of talks to widen the production deal.

Libya and Iran have snubbed the initiative, arguing that they will need to boost their crude output further before considering joining any caps on production.

Traders such as Vitol, Gunvor and Glencore are betting on oil markets remaining oversupplied for at least two more years.

Traders are looking to extend or lock in new leases on storage tanks for crude and refined products in key hubs as far out as the end of 2018, sources at storage firms and trading houses say.