Oil: Prices drop as stockpiles hold up

NEW YORK - Oil prices fell sharply on Wednesday after a US government report showed a smaller-than-expected decline in stockpiles last week as higher imports and slower refinery activity muted the effects of Hurricane Dennis.

US light, sweet crude oil futures CLc1 settled down 74 cents to $56.72 a barrel, after dropping as low as $56.10, the lowest since June 30. London Brent crude LCOc1 fell 71 cents to $56.65 a barrel.

The US Energy Information Administration said Wednesday morning that crude oil inventories in the world's largest consumer fell 900,000 barrels, far less than anticipated thanks to higher imports and slower demand from refineries.

Analysts polled by Reuters had expected the report to show a decline of 3.7 million barrels after high winds and waves from Hurricane Dennis cut into offshore oil production in the Gulf of Mexico and delayed imports.

"Crude imports increased last week and that was a bearish surprise," said Jim Ritterbusch, president of Ritterbusch and Associates.

US crude oil, petrol, and distillate inventories are holding in the upper part of the average range for this time of year, according to the weekly report from the EIA.

The inventory buffer will soothe some anxieties over whether refiners can meet peak demand this winter. Many still fear the taut global supply chain is ill-prepared to deal with unexpected outages.

"Prices remain elevated above fundamental levels by a risk premium related to various supply concerns, geopolitical tensions and speculation on futures markets," said Gerard Burg, minerals and energy economist at National Australia Bank Ltd.

Losses Wednesday countered some early support after the US embassy in the Saudi capital Riyadh advised US citizens it had received indications that militants were planning attacks in the kingdom.

The embassy gave no details on when the attacks might take place, or against what targets. Militants have killed 91 foreign nationals and Saudi civilians in the last two years.

"We've had several bombings in Saudi Arabia in the last few years and every one of them has caused a spike in the oil futures market but not one of them has affected oil production," said Anais Faraj, global strategist at investment bank Nomura.

ACTIVE STORM SEASON

Emily, the fifth named storm in the most active start to the hurricane season on record, spared most US oil and gas operations offshore and swerved away from coastal refineries before making landfall in Mexico.

It forced Mexico to shut down nearly 3 million barrels per day (bpd) of production, about half of which is exported to the United States. Exports are expected to return to normal by the end of this week.

The unusually active start to the hurricane season -- which extends until November -- has heightened fears of a possible repeat of last year's Ivan, which disrupted output for months and sent oil prices above $50 for the first time ever.

- REUTERS