However, the drop was lower than analyst expectations of 2.4 million barrels and kept US reserves above their 2016 level and the five-year average, says Reuters.
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The news sent both main global benchmarks sharply negative, dropping to levels lower than those prior to the release of yesterday's report.
Brent crude, the international oil price benchmark, fell 1.1 per cent to $51.67 a barrel at time of writing, while its US counterpart West Texas Intermediate was down 1.2 per cent at a little below $48.50.
The modest dip also will do little to dispel the notion that surging US production will undermine a reduction in output of 1.8 million barrels a day from major producers including Opec and Russia. Production had surged for 16 weeks in a row to last week.
There are still widespread doubts that the production cuts will rebalance the global market, despite pledges from Saudi Arabia and Russia to extend the deal into next year.
However, analysts are still of the general view that if that extension is confirmed next week, oil will rally again.
“Markets seem to be holding their breath ahead of the OPEC meeting next week,” Michael Poulsen, oil risk manager at Denmark-based Global Risk Management, told MarketWatch.
Oil price rally stalls amid supply doubts
17 May
A rally for the oil price has "stalled" and will only pick up again this week if data on US reserves later this afternoon shows a big reduction.
Oil has been recovering lately after the Saudi Arabian and Russian oil ministers signalled their support for an extension to an agreement to cut global output by 1.8 million barrels a day.
But amid rising production in the US, some experts doubt the market will rebalance supply and demand in the near future.
Yesterday the International Energy Agency (IEA) tentatively added its name to that list, warning in a report "that an extension to the Opec-led production cut agreement won't be enough to rebalance the global crude market", says MarketWatch.
Last night, data published by the American Petroleum Institute defied analyst predictions and recorded an increase in US reserves last week.
More comprehensive data from the US Energy Information Administration is due later this afternoon.
"The oil rally has paused and whether it can resume depends on today's EIA inventory report," Ole Hansen, head of commodity strategy at Saxo Bank, told Reuters.
"Jefferies bank said it was lowering its oil price forecasts due to the strong rise in US production" and "cutting its Brent price estimate for the second half of 2017 to $59 per barrel from $61 previously," the news agency added.
Brent crude, the international oil price benchmark, was spared losses this morning. It was trading more or less where it was at the start of the week – a little above $52 a barrel – at the time of writing.
Oil price surges after Russia adds to cuts extension call
15 May
The oil price is back on the front foot after Russian energy minister Alexander Novak added to hopes of an extension to the Opec-led production cuts.
After a meeting in Beijing this weekend, Novak and his Saudi Arabian counterpart Khalid al-Falih, who previously hinted at the cuts continuing, issued a joint statement calling for the agreement to continue until March 2018.
As a result, Brent crude, the international oil price benchmark, was up 2.5 per cent this morning to more than $52 a barrel. It's US counterpart West Texas Intermediate was up 2.6 per cent at a little more than $47.
"Falih said the next round of cuts will be on the same terms as the first curbs deal, to cut almost 1.8m barrels a day," says the Financial Times.
"Russia is the world’s biggest oil producer," adds the paper, while Saudi Arabia, the de facto leader of the Opec cartel, "is the biggest exporter".
Traders were worried the original deal, which is due to expire at the end of June, would not be enough to rebalance the market, especially as US supply has surged in recent months.
"Opec ministers are due at the end of this month to meet in Vienna, to discuss an extension of the cuts deal… when the final decision will be made," adds the FT.
Earlier this month, the oil price was in the doldrums at well below $50 a barrel, as surging global inventories added to doubts that the market was beginning to balance supply and demand.
However, despite US production continuing to rise, a big draw on US reserves last week put trading back on the front foot, boosted by this weekend's news.
Oil price back above $50 on bullish data
11 May
Oil prices rebounded strongly yesterday and were continuing to move higher this morning, after an extremely encouraging report on reserves in the US.
Brent crude, the international oil price benchmark, jumped three per cent on Wednesday in New York and was 1.4 per cent up this morning to a little below $51 a barrel.
Its US counterpart West Texas Intermediate (WTI) followed a similar trajectory and was this morning above $48 a barrel. Last week, it dropped below $44 after mounting concerns that a 1.8 million barrel-per-day cut in production from producers including Opec and Russia will not be enough to rebalance supply in the market by the time it ends in June.
There were also worries over rising US production after 16 weeks of rising drilling activity since oil prices rebounded above $50.
However, yesterday's weekly report from the US energy regulator the Energy Information Administration showed a drop in inventories of more than five million barrels.
Greg McKenna, at brokerage at AxiTrader, told Reuters: "We saw the biggest draw in inventories for the year last week with stockpiles down more than five million barrels and it looks like Opec's production cut is finally biting,"
US inventories are only one measure of global supply, however, and trends are related as much to refinery activity as global output.
So the test of whether the oil price rally continues will be whether reserves continue to fall and if US production continues to rise.
Jenna Delaney, at Platts Analytics, said: "Crude prices continue to be sensitive to headlines surrounding US production growth and Opec output cuts, despite the fact the market largely expects those dynamics to persist," said Jenna Delaney, at Platts Analytics.
Oil price heads south again as US drilling keeps rising
8 May
Oil prices are struggling to find consistent support and turned negative again during London trading today after a relief rally in Asia overnight.
Prices slumped at the end of last week as a result of US inventory data that was more bearish than expected, adding to the sense that Opec supply cuts are not enough to rebalance the market.
A rally followed after Khalid al-Falih, Saudi Arabia's energy minister, said he still expects the cartel's deal to cut production to be extended for the whole of 2017.
However, it has been some while since such comments alone were enough to ease trader sentiment and international oil price benchmark Brent crude, having rebounded from below $48 a barrel, hit a ceiling around $49 today.
It was down 0.4 per cent to $48.92 a barrel this afternoon.
Its US counterpart West Texas Intermediate fell below $45 at the end of last week and after a similar rally, was down 0.1 per cent at $46.19 a barrel this afternoon.
Market optimism is being undermined by a rise in production in the US. On Friday, consultancy Baker Hughes reported the number of active drilling wells in the country had hit 703, the 16th straight week of increases.
Hussein Sayed, of brokerage FXTM, told Reuters: "It's all about inventories and US shale versus Opec."
"OPEC members have no choice but to talk up prices by signalling an extension to the production cuts agreement."
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