Oil: Prices drop another 5 per cent to $43 a barrel

Oil prices crumbled another 5 per cent to around $43 a barrel on Thursday, suffering the biggest two-day slide since the Gulf War after a rise in US heating oil stocks triggered furious selling.

US crude oil futures fell $2.34 a barrel to $43.15 a barrel after striking a 12-week low of $42.50. London Brent dropped $2.21 to $40.10, the first fall below $40 a barrel in three months.

After US crude plunged $3.64 Wednesday, the combined two-session fall is the fourth biggest in the New York Mercantile Exchange's history and the steepest since January 1991 during the first Gulf War, according to Reuters figures.

Big-money speculative funds and local traders in New York and London have bailed out in force, pulling down prices now $13 below their October all-time high, although still 30 per cent up from the start of the year.

"There's been a lot of liquidation. It could be that people think it's been a great party but it might just be over," said Peter Gignoux, senior oil advisor for GDP Associates in New York.

Lean US stocks of heating fuel are rising as US refineries ramp up runs after maintenance and unusually mild early winter weather in the US Northeast limits demand.

A US government agency report Wednesday showed distillate stocks, including heating oil and diesel, rose 2.3 million barrels in the week to Nov. 26 to 117.9 million barrels.

A smaller than expected fall in natural gas stocks last week, and an upward revision to the previous week's level, reported by the US government Thursday, accelerated the losses.

"Distillates remain below the average range for this time of year, but demand for heating fuel at the moment is low and is likely to remain so over the next couple of weeks given moderate forecasts for the eastern and Midwestern US," said brokers Refco.

Opec PUMPS ON

Crude stocks are building too as Opec oil producers produce at the highest level in 25 years and signals from the cartel that they will keep pumping at current levels are also weighing on prices.

Opec's outgoing president and secretary general said on Thursday that the group will allow members to continue pumping above official quotas in the first quarter of next year if oil prices stay high.

"I think we will tolerate overproduction because the price is still high," said Purnomo Yusgiantoro, also Indonesia's oil minister. "We will allow Opec members to produce more."

Opec is due to meet in Cairo on Dec. 10 to decide on output policy for the first quarter. Opec's 10 members excluding Iraq pumped an estimated 27.9 million barrels per day (bpd) in October, 900,000 bpd over a ceiling that came into effect Nov 1.

Opec's second biggest producer Iran has said the group should trim quota-busting output to avoid a winter stockbuild. The group has projected a big winter inventory build if it keeps pumping at current rates.

Cartel earnings have also been hit by the weaker dollar, which has fallen to a succession of life lows versus the euro, and big discounts for its mainly heavy, sour exports.

- REUTERS