Oil: Prices sink below $48 to three-month low and stocks high

LONDON - Oil prices dived below $48 to a three-month low on Friday, notching up steep losses for the third session in a row on news US inventory levels have reached their highest levels for six years.

US crude oil was trading 74 cents lower at $47.80, which was the weakest level since mid-February. It marked a fall of nearly 20 per cent from the record-high of $58.28 hit on April 4.

Brent crude prices fell 53 cents to $47.81 a barrel.

This week's sell off began with US government data on Wednesday that showed US oil inventories had swollen to a six-year high of 329.7 million barrels.

Many in the market believe the sell-off could be short-lived and managers of investment funds, which played a part in driving up prices to April's record, have said this week's dip below $50 was a buying opportunity.

They say the current surplus of oil is offset by limited spare production capacity and long-term supply tightness.

"Clearly, North American inventories have been building up and that's something people have been focusing on, but the overall situation remains that the market is extremely tight," said Ian Henderson of JP Morgan Fleming.

"I, for choice, believe that any period of weakness is probably a buying rather than a selling opportunity."

SPARE CAPACITY DEPLETED

The last time US crude stocks were as large, the price of US crude was around $20 a barrel.

But a key difference between now and then is that spare production capacity has been all but eliminated as the Organisation of the Petroleum Exporting Countries is pumping flat out.

Another major contrast is the rise of China to be the world's second largest oil consumer after the United States.

On Friday, analysts said China's crude oil imports for April so far were 23 per cent higher than a year ago and had reached an all-time monthly high of 12.25 million tonnes.

They said China had cut back on product imports and increased its processing of crude oil to maximise domestic margins.

Other indications have suggested Chinese energy demand growth could be slowing.

The International Energy Agency in its monthly report published this week said incremental demand in China and also Europe and the United States was less than expected as weakening economic growth and inflated fuel costs slowed growth.

Some analysts predict Opec, which next meets in Vienna in June, will cut back supplies to prevent prices falling too far, though some have suggested that if the US dollar continued to strengthen that could stay their hand.

A stronger US dollar increases the spending power of producer countries, which receive oil revenues in dollars.

On Friday, the dollar hit a seven-month high against the euro after robust data raised optimism about the US economy.

- REUTERS