U.S. Markets closed

Oil slips as ample supply counters Yemen, drilling slump

A woman pumps gas at a station in Falls Church, Virginia December 16, 2014. REUTERS/Kevin Lamarque

By Robert Gibbons

NEW YORK (Reuters) - Crude settled lower on Monday as ample global supply blunted support from the conflict in Yemen and the falling number of U.S. rigs drilling for oil and kept traders cautious after prices reached 2015 peaks last week.

U.S. commercial crude inventories have risen for 15 straight weeks to a record 489 million barrels even with the recent fall in drilling activity.

"While the situation in Yemen and the falling U.S. rig count have supported, some caution remains because we have not seen evidence the cuts in drilling have translated into lower inventories," said Gene McGillian, senior analyst at Tradition Energy in Stamford, Connecticut.

Brent June crude futures fell 45 cents to settle at $64.83 a barrel, having swung from $64.40 to $65.61. Friday's $65.80 intraday high was a 2015 peak.

U.S. June crude slipped 16 cents to settle at $56.99, having traded from $56.52 to $57.89. It hit a 2015 peak of $58.41 last Thursday.

Brent's premium to U.S. crude reached $8.33 a barrel on Monday, but ended at $7.84 based on settlements falling short of Friday's $8.43 peak.

Another sign of plentiful supply was news that Saudi Arabia's Oil Minister Ali al-Naimi told officials in Beijing that the kingdom is ready to supply China with additional oil.


Yemen's humanitarian crisis worsened on Monday as Saudi-led aircraft pounded Iran-allied Houthi militiamen and rebel army units.

While Yemen is not a major oil producer, Gulf producers ship oil along the Gulf of Aden on Yemen's southern coast and through the narrow straits of Bab el-Mandeb, between Yemen and Djibouti. The conflict raises the spectre of a proxy war between Iran and Saudi Arabia.

The number of active U.S. oil-drilling rigs has fallen for a record 20 weeks in a row to its lowest since 2010, according to data from oil services company Baker Hughes, fuelling expectations production will drop.

But even with curbed drilling, U.S. crude stockpiles were seen up again last week, along with gasoline and distillate inventories, according to Monday's preliminary forecast from analysts surveyed by Reuters.

"Sustaining the recent oil price rally requires firmer demand and a tangible supply response," analysts at Barclays said in a research note.

While U.S. ultra-low sulphur diesel (ULSD) futures slipped, U.S. RBOB gasoline managed a higher settlement on lift from refinery problems on the U.S. Gulf Coast late last week and over the weekend.


(Additional reporting by Himanshu Ojha in London and Florence Tan in Singapore; Editing by Dale Hudson, David Goodman, Ted Botha and Marguerita Choy)