By Sarah McFarlane and Amrith Ramkumar
U.S. crude had its worst day in a year Wednesday despite a larger-than-expected weekly drop in inventories after Libya indicated it would resume export activities at its eastern ports, potentially easing fears of a global supply shortage.
Light, sweet crude for August delivery fell $3.73, or 5%, to $70.38 a barrel on the New York Mercantile Exchange -- its largest one-day percentage drop since June 2017 after it rose in eight of the 10 sessions entering Wednesday. Brent crude, the global benchmark, dropped $5.46, or 6.9%, to $73.40, its worst day since February 2016.
Libya's state-run National Oil Corp. lifted force majeure on eastern oil ports Wednesday after the ports were handed back from an armed faction, paving the way for a resumption of full production. Analysts estimate that could add hundreds of thousands of barrels of oil a day to the market and ease fears of a supply shortage.
After oil had rallied back near its highest level since 2014 earlier in the week, analysts said the news started a pattern of selling that picked up as the day went on.
"We were ripe for a correction -- here it is," said John Saucer, vice president of research and analysis at Mobius Risk Group in Houston. "I really think this is your classic long liquidation technical selloff."
Oil had rallied sharply in recent weeks as supply issues around the world bolstered the market and bullish speculative investors added to positions. Libya's unplanned outage was among the biggest drivers, but other factors include problems in Canada, strikes in Norway and U.S. sanctions against Iran.
Oil prices extended their Wednesday losses even after U.S. stockpile data showed inventories fell 12.6 million barrels last week, a much larger drop than analysts had expected. The data came after inventories surprisingly increased a week earlier and shows the U.S. is still in a tightly supplied environment, according to John Kilduff, founding partner at Again Capital.
Although he expects the supply picture to continue to underpin prices, Mr. Kilduff said the market was more focused on Wednesday's Libya news.
"That's just too big of a factor to overcome with this report," he said.
Traders were also weighing news that Saudi Arabia told the Organization of the Petroleum Exporting Countries on Wednesday that its oil output rose last month, nearing levels not seen since the country embarked on production cuts in 2016, with the rise starting before the group decided to increase cartel production in late June.
The kingdom has been under pressure from the U.S. to fill the production gap ahead of upcoming sanctions on Iran's oil exports. Analysts have been debating how quickly Saudi Arabia, the de facto head of OPEC, and other large producers could fill a potential supply gap.
Trade tensions between the U.S. and China have also caught investors' attention after the U.S. said Tuesday that additional tariffs were being considered on Chinese goods. The U.S. last week launched tariffs on $34 billion worth of Chinese exports to America.
"If the U.S. implements this additional tax on $200 billion of imported Chinese goods, it will be difficult for China not to impose greater taxes on commodities imported from the U.S.," said Olivier Jakob, head of energy consultancy Petromatrix.
China was the second-largest importer of U.S. crude in the first quarter of the year, according to data published by the U.S. Energy Information Administration. So far, it hasn't imposed tariffs on U.S. crude, and oil has remained resilient despite the turbulence hitting other assets like stocks and metals.
Among refined products, gasoline futures fell 9.9 cents, or 4.6%, to $2.0614 a gallon. Diesel futures dropped 12.1 cents, or 5.4%, to $2.1008 a gallon.
--Benoit Faucon contributed to this article.
Write to Sarah McFarlane at [email protected] and Amrith Ramkumar at [email protected]