Oil: All eyes on US petrol

NEW YORK - Oil dropped below US$70 on Wednesday after US petrol stocks rose more than expected and weakness across commodities added momentum to the sell-off.

US crude was off US$1.81, or 2.5 per cent, to US$69.9 a barrel, after rebounding 2.6 per cent on Tuesday. London Brent fell US$1.72 to US$69.28.

Some analysts saw the losses in oil as part of a wider correction in commodities, with gold down 2 per cent and copper off 6 per cent, and they said it would soon regain strength.

"The bull market for oil is not over, because the factors that have caused it are still in place: tight spare capacity for refining and crude production," said Michael Wittner, head of energy market research at investment bank Calyon.

But in the immediate term, dealers were focused on swelling petrol inventories in the world's biggest energy consumer.

US petrol stocks rose by 2.1 million barrels last week, versus expectations for a 1.2 million barrel build.

US oil companies have cranked up output and imports ahead of the Memorial Day holiday on May 29, the traditional launch of the US summer driving season.

DEMAND EROSION?

Recent losses have been driven by investors' growing belief that costly oil is taking a toll on demand growth, especially in the United States.

US crude was off its peak of US$75.35 hit in April, but was still 17 per cent up on the start of the year.

More evidence of demand erosion may emerge after China, the world's second biggest consumer, raised state-capped retail petrol and diesel prices, pushing them up 15 per cent so far this year.

But even slower consumption growth could strain supply.

"Global oil demand growth of 1.2 million bpd for 2006 is still healthy enough to keep the spare capacity cushions for refining and crude production thin," said Calyon's Wittner.

Fears of a rough Atlantic hurricane season were also underpinning oil.

The US National Oceanic and Atmospheric Administration said there could be up to 10 hurricanes this year.

The US Gulf has yet to recover from a lashing last year, with 20 per cent of crude and 13 per cent of natural gas production not yet recovered.

US Energy Secretary Sam Bodman told Reuters on Tuesday that up to 10 per cent of that output might be lost forever.

The role of geopolitics as oil price driver has faded for now. World powers met in London on Wednesday to discuss a package of incentives to try to defuse tension with Iran over its nuclear programme.

But Tehran quashed hopes for a speedy solution, saying it wanted a full range of nuclear technology. (Additional reporting by Richard Valdmanis in New York)

- REUTERS