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Feb. 17, 2017, 3:36 p.m. EST

Oil logs weekly drop on concerns over rise in U.S. crude supply and output

Higher oil prices have invited other producers to ramp up output

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By Myra P. Saefong, MarketWatch , Jenny W. Hsu

The Khurais oil field, about 160 km (99 miles) from Riyadh, pictured June 2008

Oil futures barely budged Friday, but fell for the week—caught between larger-than-expected growth in U.S. crude stocks and reports that OPEC members may exercise an option to extend a pact to cut production by six months.

March West Texas Intermediate crude  rose 4 cents, or less than 0.1%, to settle at $53.40 a barrel on the New York Mercantile Exchange. The March contract will expire at Tuesday’s settlement. Monday is a holiday, Presidents Day, for U.S. financial markets.

Read: Which markets will be closed on Presidents Day?

For the week, WTI futures prices ended about 0.9% lower, which was their first weekly decline in three weeks, according to FactSet data.

April Brent crude  added 16 cents, or 0.3%, to $55.81 a barrel on London’s ICE Futures exchange, for a weekly loss of about 1.6%.

Many factors are driving oil prices right now, including whether OPEC production cuts will be extended past June and the U.S.’s “ability to ramp up shale production to mitigate the impact of the [Organization of the Petroleum Exporting Countries] production cuts,” said Bob Silvers, managing director, in charge of energy practice at SSA & Company, a New York-based management consultancy.

Oil traders are also looking at lower demand for U.S. gasoline, amid high supplies of the fuel, and weighing developments in the global economy, he said.

U.S. government data show inventories of motor gasoline at just over 259 million barrels for the week ended Feb. 10—the highest level on record, while implied demand for the fuel over the last four weeks was down 5.3% from the same period a year ago.

Read: Gasoline prices may rise to a more than 2-year high by Memorial Day

Oil prices have traded within a tight range since the start of the year, with investors monitoring the extent to which OPEC members have reduced production. The cartel, along with other key producers including Russia, agreed last year to cut around 1.8 million barrels a day of oil output starting in January.

The deal sent prices around 20% higher, which has provided incentive for producers outside of the pact, including in the U.S., to increase their output. Industry data pegged compliance with the agreement at about 90% in January.

On Thursday, Reuters reported that OPEC sources said the cartel could extend the six-month deal to cut supply, or make more severe cuts, if oil stocks don’t drop by around 300 million barrels to the five-year average.

According to OPEC’s latest oil report, commercial oil stocks of the Organization for Economic Cooperation and Development countries are still around 299 million barrels above the latest five-year average.

In the short term—one to two years—“as long as U.S. demand/consumption is stable or slightly decreasing and OPEC maintains their current production cuts, U.S. shale production, which can continue to ramp up quickly, will keep prices relatively stable,” said Silvers.

“Longer term, we’ll need to see inventories drop and a reversal of these factors impact a sustained upward trend in prices,” he said.

Talk of possibly extending the supply cut pact come at time when U.S. production is showing a strong revival. The EIA forecasts that U.S. output to average 9 million barrels a day this year and grow another 500,000 barrels a day next year.

A report from Baker Hughes  Friday also showed a fifth straight weekly climb in the number of active U.S. rigs drilling for oil, which is a proxy for oil activity.

And data published by the U.S. Energy Information Administration on Wednesday showed that domestic crude stocks grew by 9.5 million barrels in the week ended Friday Feb. 10 to total 518.1 million barrels—the highest weekly total on record.

Read: How U.S. crude-oil inventories rose to their highest level ever

Elsewhere in the energy complex, gasoline for March  shed less than a cent to $1.517 a gallon, feeding a loss of roughly 4.6% for the week, while March heating oil ended at $1.636 a gallon, up under a cent—for a weekly decline of 1.8%. 

Natural gas for March  lost 2 cents, or 0.7%, to $2.834 per million British thermal units. It logged a third straight weekly decline, down 6.6% from last Friday.

--Sarah McFarlane and Sara Sjolin contributed to this article

Myra Saefong is a MarketWatch reporter based in San Francisco. Follow her on Twitter @MktwSaefong.

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