Oil falls 1% despite large U.S. stockpile decline

By Stephanie Kelly

NEW YORK (Reuters) - Oil prices fell 1% on Wednesday, failing to draw lasting support from a large decrease in U.S. crude stockpiles as investors worried about global oil demand.

Brent crude futures dropped 65 cents, or 1%, to settle at $63.18 a barrel, while U.S. West Texas Intermediate (WTI) crude futures fell 89 cents, or 1.6%, to settle at $55.88 a barrel.

Earlier in the session, the front-month Brent contract flipped to trade at a discount to the second-month contract , a market structure known as contango, for the first time since March. Sentiment in the oil market has darkened as investors worry that slowing global economic growth will weaken demand for oil.

On the supply side, OPEC members Saudi Arabia and Kuwait have discussed resuming oil production in jointly operated fields in the Saudi–Kuwaiti Neutral Zone, Kuwaiti state news agency KUNA said on Wednesday.

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The two countries halted output from the oilfields - Khafji and Wafra - more than four years ago, cutting some 500,000 barrels per day, or 0.5 percent of global oil supply.

Oil prices initially rose after Energy Information Administration data on Wednesday showed a large drawdown in U.S. crude stockpiles. Crude inventories fell by 10.8 million barrels in the week to July 19. Analysts expected a decrease of 4 million barrels.

But the gains did not hold.

“The market is going to try to say that (the drawdown) was probably due to (Hurricane Barry), and so the market is not overreacting to it,” said Phil Flynn, an analyst with Price Futures Group in Chicago.

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U.S. oil companies cut some production in the Gulf of Mexico ahead of Hurricane Barry, which came ashore in Louisiana earlier this month.

Meanwhile, investors eyed heightened tensions in the Middle East.

A U.S. Navy ship took defensive action against a second Iranian drone in the Strait of Hormuz last week but did not see the drone go into the water, the U.S. military said on Tuesday.

Iran’s president, Hassan Rouhani, said on Wednesday his country was ready for “just” negotiations but not if they meant surrender.

Also fuelling tensions, Britain gained initial support from France, Italy and Denmark for its plan for a European-led naval mission to ensure safe shipping through the Strait of Hormuz following Iran’s capture of a British-flagged tanker.

The military adviser to Iran’s supreme leader was quoted on Wednesday as saying that any change in the status of the Strait of Hormuz, which Tehran says it protects, would open the door to a dangerous confrontation.

“We are not expecting much bullish assistance from this week’s rising tensions in the Persian Gulf, at least until a significant amount of physical oil supply is disrupted,” Jim Ritterbusch of Ritterbusch and Associates said in a note.

(Reporting by Stephanie Kelly in New York; additional reporting by Ahmad Ghaddar in London, Roslan Khasawneh in Singapore and Aaron Sheldrick in Tokyo; Editing by Steve Orlofsky)

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