Oil drops sharply on Fed outlook, ample supply

A pump jack operates at a well site leased by Devon Energy Production Co. near Guthrie, Oklahoma.
Nick Oxford | Reuters

Oil dropped on Thursday, declining for the first time in six days, after the U.S. Federal Reserve dampened hopes for a string of interest rate cuts and as rising U.S. output helped keep the market well supplied.

The Federal Reserve reduced rates on Wednesday, but against expectations the head of the U.S. central bank said the move might not be the start of a lengthy series of cuts to shore up the economy against global economic weakness.

Brent crude, the international benchmark, fell $1.49 to $63.56 a barrel. U.S. West Texas Intermediate (WTI) crude was down $1.77, or 3% at $56.81.

"A relatively upbeat mood in risky assets took a spectacular U-turn after last night's Fed decision," Tamas Varga of oil broker PVM said. "The dollar started to strengthen and equities and oil went into a kind of meltdown mode."

A rising dollar makes oil more expensive for holders of other currencies and tends to weigh on commodities priced in the U.S. currency. The dollar hit a two-year peak against the euro on Thursday after the Fed decision. 1/8USD/ 3/8

Oil's drop came despite a bigger-than-expected decline in U.S. inventories and a fall in OPEC production in July, typically bullish drivers for prices. But U.S. output rose in a market that analysts say is well supplied.

"Supply is plentiful and demand growth is showing signs of weakening globally because of trade conflicts, Brexit and other events that tend to potentially weaken economic growth and, hence, oil demand," Victor Shum, senior partner at IHS in Singapore, said.

"There's a lot of oil out there. U.S. output is growing strongly."

OPEC and partners including Russia, an alliance known as OPEC+, have been curbing output this year to support the market. In July, OPEC production revisited a 2011 low, helped by a further cut by Saudi Arabia, a Reuters survey showed.

But rising supplies from non-aligned producers including the United States have offset the OPEC+ efforts. U.S. output rebounded to 12.2 million barrels per day (bpd) from 11.3 million bpd a week earlier, government data showed on Wednesday.

Adding further downward pressure on prices was a lack of progress by the United States and China in resolving their year-long trade dispute. Negotiators ended talks on Wednesday and agreed to meet again in September.