Oil selloff talk picks up as supply balloon grows

A government report showing an increase in already-record crude supplies fanned speculation the market is setting up for a selloff that could take oil prices to a new cycle low.

West Texas Intermediate futures fell below $48 per barrel after the morning report, but bounced back to close just slightly lower at $48.17, down 12 cents. Futures for Brent, the international benchmark, traded higher, just below $58 a barrel.

Crude oil supplies rose 4.5 million barrels in the last week to 448.8 million—a ninth week of gains and an 80-year high, according to the Energy Information Administration. Oil stored at Cushing, Oklahoma, the physical delivery point for WTI futures, rose by 2.3 million barrels to 51.5 million.

Read MoreBrent, WTI diverge after supply data

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"It says a lot of the world's oversupply is finding its way to storage in North America," said Andrew Lipow, president of Lipow Oil Associates. "It's bad for producers. Compared to this time last year, crude oil inventories are over 20 percent higher."

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Many oil analysts expect another violent selloff in crude this spring. Some project that to take WTI closer to the $40 level or lower, carving a new bottom for prices. WTI's recent closing low was $44.53 per barrel on Jan. 29, before moving higher during February.

Production of U.S. oil last week rose to a multidecade record of 9.37 million barrels a day, from 9.32 million the week earlier. Weekly data show oil production has consistently surpassed 9 million barrels a day since November in the longest stretch since the 1970s.

"It says prices are going to remain under pressure," said Lipow, who expects oil to retest its recent low and head to $40 before the next selloff is over.

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Targets may vary, but oil analysts expect the seasonal forces and supply to combine to spur another selloff.

"I'm not necessarily calling for a new low. We may have seen it in the price crash. I'm just saying we're in for a serious wave of downward pressure," said Michael Wittner, head of U.S. commodities research at Societe Generale. Wittner said he expects an average price of $47 per barrel for WTI in the second quarter, and that should rise in the second half of the year.

Demand drops off seasonally when refineries undergo maintenance as they shift to summer blend gasoline. The industry is currently in the process of that maintenance, but the refiners, in the past week, processed 15.3 million barrels a day, a slight increase from 15.1 million barrels the week earlier.

One surprise in the government report was a substantial drop in the amount of weekly crude imports, to 6.3 million barrels a day from 6.9 million barrel and well below the four-week average of 7.1 million barrels. Lipow said much of the drop was on the West Coast, and could have been impacted by the outage at Exxon Mobil's Torrance, California, refinery.

"Cushing continues to build. Refinery runs picked up a little bit, and I think the most interesting thing was despite all the refinery problems with cat cracker issues, gasoline inventories were virtually unchanged," said Lipow. He added that the recent rise in gasoline prices appears to be ending, with retail prices turning Tuesday after climbing for 40 days.

Wittner said the high level of U.S. oil production means supply—and pricing pressures—will remain for now. But he said fresh government data Tuesday showed that the shale oil drillers are vulnerable to lower prices.

U.S. oil production is closely watched as it was expected to level out and possibly decline on lower prices for crude. Wittner said shale is showing some vulnerability though overall production has grown.

The EIA revised its 2015 oil production expectations higher to 9.35 million barrels a day, from 9.3 million. However it reduced 2016 to 9.49 million barrels a day from 9.52 million. It cited anticipated production declines in North Dakota's Bakken fields and Eagle Ford in Texas.