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Oil market to ring in more gloom with 2016

In an ominous sign for first-quarter oil prices, U.S. government data showed a surprise stockpiling of crude and no slowing in production as the year comes to a close.

The weekly Energy Information Administration data showed a jump of 2.6 million barrels of inventory, when many analysts expected a decline. Inventories dropped sharply — by 6 million barrels the previous week.

"More bad news for the oil patch, as inventories across the board rose, especially at a time of year when we expect inventories to decline as refiners meet their end of year inventory targets," said Andrew Lipow, president of Lipow Oil Associates.

The report comes as the market absorbs the fact that Saudi Arabia has made a strong commitment to produce more oil even as it is being forced to cut back on domestic subsidies due to the impact of weaker crude prices on its budget.

The fact that the kingdom signaled it is willing to take more domestic pain to maintain market share suggests to some traders that prices could stay low for even longer.

U.S. oil production, meanwhile has remained fairly steady. It climbed to 9.2 million barrels a day last week from 9.179 million barrels a day the week earlier. That is above the 9.13 million level at this time last year, but below the peak of 9.6 million barrels per day.

"You are seeing another round of capex cuts that should entail more drilling cutbacks. We still haven't reached the threshold where production is going to drop. The longer we stay at these levels, the more convinced I am that this low-price environment is going to be around for a long time," said Gene McGillian, an analyst at Tradition Energy. McGillian said he does not expect a real turn toward higher prices until the end of next year.

West Texas Intermediate futures on Wednesday fell to $36.60 per barrel, down 3.4 percent. The decline began in late trading Tuesday when American Petroleum Institute data also showed a surprise build in inventories when analysts expected a decline.

While he's not willing to match the $20 per barrel forecasts of some, McGillian said the WTI price could easily retreat to the $32.40 per barrel, reached in the thick of the financial crisis in late 2008.

The U.S. inventory report also showed an increase of 1.8 million barrels in distillates, including diesel fuel, and 900,000 barrels of gasoline. Building supplies of refined products suggests less demand for oil by refineries.

The U.S. also imported more oil last week — 7.9 million barrels a day, up from 7.3 million barrels the week earlier.

Lipow said the report shows the low-price trend will continue.

"It means that prices are certainly going to remain under pressure for the first quarter of 2016, as the market expects to see more Iranian supply at the same time refiners go down for maintenance," said Lipow.

Iran has committed to returning 500,000 barrels a day to the market as soon as sanctions against it are lifted, and many analysts expect that to occur in the first quarter.