Oil drops 4% to below $30 a barrel as glut grows, output cuts eyed

Oil dropped 4 per cent to below $30 a barrel on Wednesday as US crude stockpiles ticked up and diesel inventories swelled, offsetting OPEC-led cuts in production and hopes for a recovery in demand as some countries ease coronavirus lockdowns.

Brent settled down $1.25, or 4 per cent, at $29.72 a barrel, the first loss after six consecutive sessions of gains. West Texas Intermediate (WTI) crude fell 57 cents a barrel to $23.99.

Brent crude has almost doubled since hitting a 21-year low on April 22. But the market was cautiously eyeing a deal led by the Organization of the Petroleum Exporting Countries to cut output by a record 9.7 million barrels per day from May 1, equivalent to about 10 per cent of world demand before the coronavirus crisis led to a slide in consumption and prices.

Iraq has yet to inform its regular oil buyers of cuts to its exports, suggesting it is struggling to fully implement the OPEC deal with Russia and other producers on a record supply cut, traders and industry sources said.

Less than full compliance by Iraq, as well as by smaller producers such as Nigeria and Angola, could hurt the OPEC+ group's efforts, even as Russia's output in the first five days of May fell close to its production target, two sources familiar with the data told Reuters.

Signalling a slow recovery in demand, data from the Energy Information Administration showed US crude and distillate inventories rose last week.

Crude inventories rose for a 15th week in a row, increasing by 4.6 million barrels, the EIA said, which was less than analysts' expectations in a Reuters poll for a 7.8 million-barrel rise.

"That smallish crude oil build was certainly supportive, but there are still problems facing the market in this report," said John Kilduff, a partner at Again Capital in New York. "That huge build in distillates shows that the impact from a lack of airline traffic and over-the-road truck traffic, so that doesn't speak well about the economy and demand going forward."

Gasoline demand is also far below year-ago levels.

In April, global oil demand was expected to collapse by at least 20 per cent, an unprecedented drop, as governments told people to stay at home.

Investors hope for a recovery now that Italy, Spain, Nigeria and India as well as some US states have started to allow some people to go back to work and opened up construction sites, parks and libraries.

Germany's federal government and 16 states have agreed on ways to relax the lockdown.

For now though, soaring inventories are a reminder of excess supply lingering in the market.

"We would tend to agree that the market has bottomed out, but would caution against getting overly excited about this," said analysts at JBC Energy. "The data trundling in for April really is shockingly bad."