OILFIELDS: Natural gas flares are seen at an oil pump site outside Williston, North Dakota, in this March 11 2013 file photo. Picture: REUTERS
OILFIELDS: Natural gas flares are seen at an oil pump site outside Williston, North Dakota, in this March 11 2013 file photo. Picture: REUTERS

Tokyo — Oil prices dropped on Wednesday after an industry group reported that US crude inventories rose last week, defying analyst expectations for a significant reduction.

Brent futures were down 31c, or 0.4%, at $71.85 a barrel by 2.40am GMT. They rose 32c to $72.16 a barrel on Tuesday, after earlier touching a three-month low.

US West Texas Intermediate crude was down 36c, or 0.5%, at $67.72. It settled up 2c at $68.08 a barrel the session before, coming off a nearly one-month low.

The benchmarks had steadied after big declines on Monday and last week as supply disruptions in Venezuela came to the fore and as analysts had been forecasting a decline of 3.6-million barrels in US inventories for the week through July 13.

But the spectre of oversupply quickly returned, with a rise of more than 600,000 barrels in US crude stockpiles, reported by the American Petroleum Institute (API) late on Tuesday.

Official numbers from the US Department of Energy’s Energy Information Administration (EIA) are due on Wednesday.

On the demand-side, intensifying risks over trade tension between the US and China could drag on the global economic outlook, BMI Research said.

"Despite US-China trade tensions, the economic outlook is broadly positive, but a number of headwinds are emerging, not least a stronger dollar, rising inflationary pressures and tightening liquidity," BMI said.

"Slowing trade growth will weigh on physical demand for oil, with the shipping, road and air freight sectors an important pillar of demand globally," BMI said.

One US central banker added her voice late on Tuesday to those sounding caution on trade.

Kansas City Federal Reserve Bank president Esther George said that uncertainty over US trade policy could slow the economy, even if the recently imposed tariffs in and of themselves are too small to have a big impact.

George called trade policy a "significant" downside risk to her outlook for economic growth, even as tax cuts and other fiscal policy is an upside risk.

Reuters