Oil prices retreated slightly Wednesday as investors reacted to a smaller-than-expected U.S. gasoline stock draws as they awaited the outcome of discussions in Vienna between OPEC and other oil-exporting countries on whether to extend output cuts.
U.S. crude oil inventories fell for the seventh straight week as refiners processed a near-record amount of crude last week, the Energy Information Administration said on Wednesday, even as gasoline and distillate stocks also dipped.
Crude inventories fell 4.4 million barrels in the week ended May 19, more than analysts' forecasts of a 2.4 million barrels decline. But gasoline inventories fell by only 787,000 barrels, compared with expectations for a 1.2 million barrel draw.
The data comes one day before the Organization of the Petroleum Exporting Countries, along with non-member producing nations, are scheduled to decide whether to extend an agreement to cut world supply, an effort that has only recently started to bear fruit in global inventory figures.
Both benchmarks have gained more than 10 percent from their May lows below $50 a barrel, rebounding on a consensus that OPEC and other producers will maintain strict limits on production in an attempt to drain persistent global oversupply.
Having cleared this week's U.S. data, the focus now shifts to the outcome of the OPEC meeting tomorrow, said Abhishek Kumar, Senior Energy Analyst at Interfax Energys Global Gas Analytics in London. "While consensus is growing on extending the cap by another nine months, a deeper cut is unlikely.
OPEC has promised to cut supplies by 1.8 million barrels per day (bpd) until June and was expected on Thursday to extend that cut as long as nine months.
A multination ministerial committee consisting of some key OPEC and non-OPEC members recommended on Wednesday keeping the cuts at the same level when producers meet the following day, an OPEC source said.
"A nine-month extension of the production cuts agreed six months ago is meanwhile regarded as a done deal," Commerzbank said in a note.
"After all, OPEC's target of bringing global stocks back to the five-year average level is still far from achieved."
The OPEC-led cuts would only result in a balanced market this year, BMI Research said, but from 2018 onward, markets would return to oversupply, albeit at a lower level than 2013-2016.
One reason why markets have not tightened more has been rising U.S. oil production, which has soared 10 percent since mid-2016 to 9.3 million bpd.
Benefiting from a market known as contango, in which future oil prices are higher than those for immediate delivery, U.S. drillers have sold future production in order to finance expanding output.
To stop this, Goldman Sachs analysts have suggested the oil futures price curve should be pushed into backwardation, where forward prices are below current ones.
While backwardation might be able to reduce inventories, it is less clear how OPEC could alter the forward price curve, or if that would stop production rising.
— CNBC's Tom DiChristopher contributed to this report.