US crude settles 2.77 pct lower at $46.77 amid EIA report of inventory build

An oil pump jack in Gonzales, Texas.
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Oil prices extended losses on Wednesday on an unexpected increase in U.S. crude stocks that revived worries about the supply glut that has capped prices for the past two years.

U.S. crude stockpiles rose by 2.5 million barrels to a total of 523.6 million barrels in the week through Aug. 19 as refinery inputs decreased and gasoline production fell, according to the Energy Information Administration. Analysts had expected a 455,000-barrel fall.

U.S. crude oil imports averaged over 8.6 million barrels per day last week, up by 449,000 barrels per day from the previous week, according to EIA. Over the last four weeks, crude oil imports averaged 8.5 million barrels per day, 13.3 percent above the same four-week period last year

Gasoline stocks were up by 36,000 barrels, compared with expectations in a Reuters poll for a 1.2 million-barrel drop. Distillate stockpiles, which include diesel and heating oil, rose by 122,000 barrels, versus expectations for a 400,000-barrel increase, the EIA data showed.

Don't be optimistic about an OPEC freeze: Credit Suisse

Global benchmark Brent crude was down 93 cents, or 1.86 percent, at $49.03 a barrel, after touching an intraday low of $49.07.

U.S. West Texas Intermediate (WTI) crude was down $1.33, or 2.77 percent, at $46.77 a barrel.

Brent briefly spiked above $50 in the previous session after Reuters reported Iran was sending positive signals that the country may support joint OPEC action to prop up oil prices.

But analysts and traders remain skeptical that producers will come to an agreement at a meeting in Algeria scheduled for Sept. 26-28 as various OPEC members have their own agendas.

"There is currently a race to print any freeze headlines but we have not yet seen strong substance behind them," said Olivier Jakob, managing director of PetroMatrix in Switzerland.

Iraq's prime minister said on Tuesday his country had not yet reached its full oil market share, suggesting the government would not restrain crude output as part of any OPEC agreement.

"I really can't see the sense for Saudi, in particular, to actually have some meaningful constraint on production because there is quite a lot of capacity of U.S. shale to come on quite quickly," said Ric Spooner, chief market analyst at CMC Markets.

He said he could see prices drifting closer to $45 a barrel over the next few days.

Oil Search CEO: Oil prices are near the bottom

China's state-controlled oil firm CNOOC said on Wednesday an oil price recovery was facing "significant headwinds," as it reported swinging to a loss in the first half of the year due to weak prices.

Concerns that Chinese crude demand could falter as Beijing clamps down on alleged tax evasion in the oil industry also weighed on prices in overnight trading.

Robust Chinese crude demand growth has been driven by independent refiners, also know as teapots, who began to import crude last June after obtaining government crude import quotas and licenses.

But Beijing's crackdown on alleged tax evasion in the oil industry, targeting the teapots, threatens to put a lid on Chinese demand.

"The question now is whether the teapots will start cutting runs," a Singapore-based trader said, adding that falling Chinese demand would be a double whammy for the oversupplied crude market.

— CNBC's Tom DiChristopher and Patti Domm contributed to this story.