Oil: Prices fall as US heating fuel supplies rise

NEW YORK - Oil prices fell on Wednesday after a US government report showed a surprise increase in heating oil stockpiles in the dead of winter, thanks to strong refining activity and mild weather.

US crude futures settled down 52 cents at US$43.39 a barrel on the New York Mercantile Exchange while London's Brent slipped 53 cents to US$40.51 a barrel on the International Petroleum Exchange.

The US Energy Information Administration said that distillate stocks, which include heating oil, rose by 2 million barrels last week.

The counter-seasonal increase in winter fuel supplies came as US refiners cranked up production to record levels and unseasonably mild temperatures kept heating demand at bay in the Northeast, the world's largest heating market.

"You had the distillates (supplies) higher, and the warm weather, and the record pace of production -- all bearish -- and apparently the market thinks so, too," said Jim Ritterbusch, president of Ritterbusch and Associates.

The stock build was much higher than the 160,000 barrel rise that analysts polled by Reuters had forecast. Heating oil stocks alone rose by 1.2 million barrels, though they remain about 9 per cent below last year.

The EIA said US distillate production hit a weekly record average of 4.3 million barrels per day.

The production increase from refineries led crude oil supplies to drop 3.3 million barrels, a far steeper fall than the 930,000-barrel fall analysts had expected.

On Tuesday top exporter Saudi Arabia said it had sliced 500,000 bpd from its production, bringing it down to 9 million bpd. The move was in line with OPEC's accord in December to withdraw 1 million bpd of excess supply from the world market.

Qatar's energy minister on Wednesday said his country also had implemented its part of the agreement, a much smaller cut of 40,000 bpd.

The Organisation of the Petroleum Exporting Countries wants to avoid a big build-up in global stocks ahead of the second quarter of the year, when oil demand drops at the end of winter.

Oil prices have fallen nearly US$12 a barrel from record highs above US$55 in late October.

Some OPEC ministers have said the group might need to cut formal production limits of 27 million bpd when it meets on Jan. 30 to stop prices falling further.

Escalating violence in Iraq ahead of elections at the end of the month also supported oil prices. Iraq's crude exports via a northern route to Turkey have been stopped since December, following sabotage on the pipeline.

The market has also seen a succession of supply hitches in North America and Europe.

- REUTERS