U.S. oil production continues to defy forecasts that it is on the decline, and with refiners processing as much of the stuff as they can, the glut of oil, gasoline and diesel fuel keeps growing.
That should continue to pressure oil prices, which rallied Wednesday because the large weekly build in supply was not quite as gigantic as feared. The U.S. Energy Information Administration reported that crude oil supplies grew by 8.4 million barrels last week, well below the 11.4 million reported Tuesday by the American Petroleum Institute.
related investing news
The government's lower figure helped trigger a relief rally in crude futures that erased steep losses and pushed the front month futures contract for West Texas Intermediate crude to settle at $32.30. Another factor driving oil higher was reports that possible coordination between Russia and OPEC was discussed by Russian companies. The market continues to speculate that OPEC members may strike a deal on production, but most analysts dismiss that.
"It's a record amount of crude oil in storage. It's a huge build in gasoline, but there was a little strength in distillate demand, thanks to the weather. It's squarely bearish again," said John Kilduff, partner with Again Capital.
One positive was a 4.1 million barrel drop in distillates inventories, which includes heating oil and diesel fuel. Gasoline supplies, however, grew by 3.5 million barrels.
The U.S. has now stockpiled 1.2 billion barrels of crude, and the growing supply in Cushing, Oklahoma, and elsewhere has analysts concerned that oil will start becoming difficult to store, meaning its price on the cash market could get even cheaper.
While the industry has been reporting rig shutdowns, the volume of oil pumped per day in the past week was steady at 9.2 million, but below the high of 9.6 million barrels per day in April.
"That is worrisome. The weekly number has been steady at 9.2 million for some period of time, as the EIA says shale oil production is coming off," said Andrew Lipow, president of Lipow Oil Associates. "It means the industry must be producing more in places like the Gulf of Mexico where the investments are coming to fruition at the same time onshore rig count is going down."
Baker Hughes reported the oil rig count dropped to 510 last week, the lowest number since April 2010, and about 800 fewer than the same period last year.
"For crude to start rebounding, the market needs to see a significant reduction in U.S. production in the face of declining rig counts, or else their interpretation will be the oil producers have gotten so efficient that they're maintaining high levels of production which will just add to supply this year and into 2017," Lipow said.
Michael Wittner, global head of oil research at Societe Generale, said the market appeared to overreact to the weekly U.S. inventory data.
But a clear negative remains the U.S. production level. He is awaiting for the release of more reliable monthly government data Friday, but that will be November data. In October, the U.S. produced an average 9.3 million barrels a day, according to the EIA.
"We're sitting here bouncing around $30, give or take. … Right now it's about the big picture things, and the biggest being how long can we continue around these levels? The answer is a long time I have to think, especially with some of the reports coming out in recent days. With some of the big shale producers cutting their budgets, it does increase confidence that we are going to see a big decline in U.S. crude production," Wittner said.
Platts' forecasting unit Bentek said Wednesday it expects that overall production from the major formations in North Dakota and Texas dropped slightly in December versus November.
Bentek said oil production from the Eagle Ford shale basin in Texas actually increased slightly in December, by about 11,000 barrels per day, nearly 1 percent, from November. But production in the Bakken's Williston Basin fell by 9,000 barrels a day in December, or little less than 1 percent from November levels. Bentek said Eagle Ford was down 7 percent on an annual basis, and Bakken was off by 6 percent.
The market has been pinning its hopes this week on a deal between Saudi Arabia and other members of the Organization of Petroleum Exporting Countries and non-OPEC producers. That would mean making a pact with Russia, the largest energy producer. The U.S. oil industry ranks in the top three but it is made up of dozens of independent producing companies.
Wittner said an OPEC deal is unlikely, given the fact that Iran is jut now returning to market, and he also doubts any deal could be made with Russia. Genscape reports that a first shipload of oil left Iran for South Korea as sanctions against Iran were lifted.
Read MoreWhy Iran is a problem for oil prices
The ship had been moored for a year, and Iran is estimated to have about 40 million to 50 million barrels of crude or condensates in storage on tankers.
The tanker, Serena, left Iran on Jan. 15 and docked at Fujairah before setting a course for South Korea on Jan. 20, according to Genscape.