Oil: Prices drop 3 per cent as us supplies grow

NEW YORK - Oil prices fell 3 per cent after a US government report showed a surprise increase in fuel stockpiles last week in the world's largest energy consumer.

US light crude futures fell US$1.52 to US$44.24 a barrel after dropping to a low of US$43.65, while London Brent fell US$1.73 to US$40.64 a barrel.

The US Energy Information Administration said on Wednesday morning that inventories of crude oil, distillates and petrol all increased last week, thanks to strong imports and domestic refining activity.

Analysts had expected supplies to shrink as recent frigid weather in the Northeast boosted heating demand.

"This time of year you should see draws in distillates," said Bill O'Grady, analyst at A.G. Edwards. "We got no builds in heating oil, but all you have to do is keep heating oil steady for the next three or four weeks and you're out of the woods."

Prices remain more than 35 per cent up this year, as a surge in global demand and limited spare refining and production capacity triggered waves of speculative buying.

But a generally mild start to the northern winter and a recovery in US crude production from the storm-damaged Gulf of Mexico has helped cut prices more than US$11 from their peak two months ago.

The EIA report said commercial crude stockpiles built by 2.1 million barrels to 295.9 million in the week to Dec. 17, more than 7 per cent above year-ago levels.

The EIA also said distillate fuel inventories rose 600,000 barrels to 119.9 million, narrowing the shortfall to year-ago stockpiles to about 12 per cent.

Analysts cautioned that distillate stocks were still low relative to previous years and noted that inventories of heating oil were not building.

Temperatures in the eastern United States are expected to fall below normal over the Christmas holiday, with long-term forecasters calling for a colder-than-normal January and February.

"You still have a sizeable year-on-year deficit in distillate stocks, so it's too early in the winter to write off this distillate market," said Jim Ritterbusch of Ritterbusch and Associates.

In Nigeria, Shell declared a force majeure on 114,000 barrels per day of Nigerian Bonny Light crude, following a community dispute in the restive Niger delta that has blocked some flow stations since Dec. 5.

Traders also are watching developments in the world's two biggest producers, Saudi Arabia and Russia.

A threat by militants last week to attack Saudi oil facilities and Russia's auction of top exporter YUKOS' main producing arm to an unknown company served as a reminder of the potential for supply disruptions.

Despite several attacks on foreigners in Saudi Arabia, Riyadh's heavily protected production and export facilities remain untouched.

Traders expect Russia to keep supplies flowing no matter who eventually controls Yuganskneftegaz, sold to mystery bidder Baikal Finance Group at the weekend.

Two YUKOS crude export cargoes were cancelled this week because the company could not pay port duties.

- REUTERS