Oil prices drop on surprise U.S. stockpile build

By Jessica Resnick-Ault

NEW YORK (Reuters) - Oil prices fell on Wednesday on worries that global supply is climbing as U.S. inventories rose unexpectedly and Saudi Arabia and other big producers signaled that they may increase output.

U.S. crude inventories rose 2.1 million barrels in the week to June 1, the Energy Information Administration said, a surprise after analysts had forecast a decrease of 1.8 million barrels. Fuel inventories also rose.

"Oil prices are being clobbered by a surprise build to crude stocks as total imports jumped higher, blunting the impact of higher refinery runs," said Matthew Smith, director of commodity research at ClipperData in Louisville, Kentucky.

U.S. crude output hit a record of 10.8 million barrels a day in the week, according to the EIA's weekly report. Rising production has prompted selling since global benchmark Brent (LCOc1) climbed above $80 a barrel last month.

"The continuing increase in crude oil production is weighing on the market, and quite significantly compared to this time last year," Andrew Lipow, president of Houston-based Lipow Oil Associates. U.S. oil production is up 1.5 million bpd from a year earlier.

Brent was down 40 cents a barrel at $74.97 by 11:42 a.m. (1642 GMT) U.S. light crude (CLc1) was down 73 cents at $64.79, after touching a session low of $64.27 a barrel.

U.S. crude was down almost twice as much as Brent, widening its discount from Tuesday WTCLc1-LCOc1 .

India's oil minister said his Saudi counterpart told him the kingdom was revisiting its policy of cutting production, which has been a major factor in supporting prices.

The U.S. government has unofficially asked Saudi Arabia and some other OPEC producers to boost output, sources told Reuters on Tuesday.

OPEC and Russia will meet on June 22/23 to decide whether to increase production following a fall in global inventories.

The producers have been considering a supply increase of up to 1 million barrels per day, sources told Reuters.

"The oil price is being driven by OPEC and views on how much and how quickly 'OPEC plus' will raise output," Energy Aspects analyst Virendra Chauhan said.

Balancing those expectations has been falling production in Venezuela, which has the world's biggest oil reserves and is a key supplier to American fuel markets. Its output has been hampered by inadequate investment, mismanagement and U.S. sanctions.

Three sources have told Reuters Venezuelan state firm PDVSA is considering declaring force majeure on some exports, after plummeting output and tanker bottlenecks at ports.

U.S. sanctions on Iran also threaten to reduce oil exports from that OPEC producer.

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"It's a tug of war between the loss of supply from Venezuela and Iran and the potential output increase from OPEC and U.S. shale," said Tony Nunan, risk manager at Mitsubishi Corp. "$80 is a temporary ceiling for oil until we hear from OPEC."