By Dan Molinski
-- Oil prices fell sharply Wednesday after U.S. oil inventories rose to their highest level since July 2017 and domestic oil production neared a record, sparking fears of another supply glut.
-- West Texas Intermediate futures, the U.S. oil benchmark, ended 2.7% lower at $61.42 a barrel on the New York Mercantile Exchange. It was the lowest closing price since May 13, though prices had fallen toward their lowest since March 29 at one point during the session.
-- Brent crude, the global oil benchmark, closed 1.6% lower at $70.99 a barrel on London's Intercontinental Exchange.
Inventories: Prices began falling after the Energy Information Administration on Wednesday reported weekly inventories that were virtually across-the-board bearish. The report showed U.S. oil inventories surged by 4.7 million barrels last week to 477 million barrels, the highest total since July 2017, while total inventories, which include crude oil as well as processed fuels such as gasoline, surged 17 million barrels to 1.29 billion barrels, the most since October 2017. Additionally, U.S. crude-oil production rose to 12.2 million barrels a day, just shy of a record.
"Despite a chunky drop in imports, refinery runs below year-ago levels have encouraged a second consecutive build to crude inventories -- now up over 37 million barrels, or 8.5% -- in the last nine weeks," said Matt Smith, director of commodity research at ClipperData. "An increase to both gasoline and middle distillates have rounded out a bearish-tilted report."
Ryan Giannotto, director of research at GraniteShares, an ETF issuer based in New York, said the large oil inventory rise was noteworthy both due to expectations for a decline and given the fact inventories also surged the previous week. "WTI is under serious stress today after disappointing crude inventory numbers, with a weekly build of 4.7 million barrels that overshot estimates by more than 5.3 million barrels, " he said. "This disparity is a genuine surprise, especially on the back of a yet stronger increase to inventories last week of 5.4 million barrels."
U.S.-China: Prices also continued to face downward pressure from sticky trade negotiations between the U.S. and China, the world's two largest economies, as oil investors fear tit-for-tat tariffs and the lack of any final agreement could crimp global demand for oil even as supplies are plentiful.
"The other key bearish factor in the current market -- US-China trade tensions -- has continued to escalate to start the week, with the U.S. eyeing more restrictive measures related to US companies' dealings with Chinese tech firms," said Robbie Fraser, senior commodity analyst at Schneider Electric. "While the global nature of the crude market insulates any acute impact from US-China trade barriers, the threat of a broader slowdown in global economic growth continues to raise fears that demand expectations could fall short to close out the year."
Geopolitics: Despite Wednesday's bearish turn in oil prices, Schneider Electric's Mr. Fraser also noted that geopolitical risk remains elevated, "and should challenge any major bearish turn for prices." He specifically noted oil-export limitations in Venezuela, Libya and Iran, which face varying degrees of conflict, political upheaval and international sanctions.
-- The EIA will release its monthly report on oil production on Friday, May 31.
Write to Dan Molinski at Dan.Molinski@wsj.com