Picture: THINKSTOCK
Picture: THINKSTOCK

LONDON — Oil dropped below $110 a barrel on Wednesday as oil stockpiles swelled in top oil consumer the US, where a struggling economy is limiting demand for fuel.

Further pressure came from concern a prolonged oil pipeline outage in the US Midwest would cause inventories to build up near the delivery point of the benchmark contract in Cushing, Oklahoma.

Brent lost 87c to $109.82 a barrel by 10.47am GMT, while US crude slid 49c to $96.70.

"The US economy took such a body blow three, four years ago with the financial crisis, it’s like a patient that’s been hit by a car, it’s going to take a long while for it to recover," said Jim Ritterbusch, president of Ritterbusch and Associates in Galena, Illinois.

Crude oil stocks in the US rose by 4.7-million barrels last week, according to data from industry group the American Petroleum Institute, much higher than the 2.2-million forecast by a Reuters poll.

Supply is also growing in Europe, which was reflected in a shrinking spread between May and June Brent futures. The gap between the two contracts narrowed to a nine-month low of just 8c in Wednesday’s trade.

A slew of recent weak economic data shows oil prices may face further headwinds.

Britain’s manufacturing activity shrank for a second straight month, a survey showed on Tuesday, while US factory activity grew at its slowest rate in three months in March, indicating a murky outlook for oil demand.

Europe’s demand for oil has also been hit by seasonal refinery maintenance, traders said.

The Brent-US crude spread narrowed slightly to $13.41 a barrel from its settlement in the previous session.

Brent’s premium to US crude rose to a more than one-week high of $14.66 on Tuesday amid uncertainty surrounding the impact of the ruptured Exxon Mobil Pegasus pipeline in the US Midwest.

"We could see prices for WTI come under pressure over the trading day, given the expected uptick in crude inventories following the (pipeline) shutdown," JBC Energy analysts said.

Investors said the pipeline shutdown could contribute 300,000-400,000 barrels a week to crude inventories at Cushing.

Exxon said it was developing a plan to excavate, remove and replace the ruptured portion of the pipeline, while a US pipeline agency said Exxon would need to test and submit a remedial work plan before it could resume operations.

Reuters