The Organisation of Petroleum Exporting Countries (OPEC), the world's largest oil exporters, yesterday agreed to increase production quotas by less than the market was expecting.
But the decision, based on the view that there was sufficient oil supply to meet demand, was supported by a large increase in US crude inventories.
OPEC ministers agreed to raise their self-imposed production quota by two million barrels a day from July 1st, with a further 500,000 barrels to be added to the output ceiling from August 1st.
But disappointment that OPEC did not raise its quota by as much as hoped was partly offset by better news on US gasoline and crude inventories, which are viewed as a barometer of global crude inventories.
The latest report showed US commercial crude stocks held by refiners were up by 2.8 million barrels per day (bpd), about double market expectations, and a 1.3 million bpd rise in gasoline inventories.
"This has helped ease nerves but it is still not enough," said Seth Kleinman, a market analyst at PFC Energy.
"Ideally the market would like to see gasoline inventories about 10 million barrels larger at this time of the year, when demand is especially strong."
OPEC's more modest quota increase took oil markets by surprise. The OPEC decision initially pushed up crude oil futures, but prices retreated after the release of better than expected US inventory figures.
US benchmark crude futures were 11 cents lower at $39.85 in New York, more than $2 below Tuesday's record of $42.33.
In London, Brent crude futures were 96 cents lower at $35.90. The markets had been braced for a 2.5 million bpd quota hike, accompanied by a commitment to boost output.
While the new limit will reflect the current OPEC production of about 26 million bpd, it will fall short of the expected June output.
Ali Naimi, the Saudi Arabian oil minister, said the kingdom and the United Arab Emirates planned to boost output between them by 1.1 million bpd, taking the expected OPEC production for this month to about 27 million bpd.
This leaves a cushion of 1 million bpd in idle OPEC capacity. OPEC also decided to hold its next meeting in Vienna on July 21st.
