Oil: Prices dive on swelling US supplies

Oil fell for the third straight day on Wednesday on growing US inventories and easing concerns that violence between Hizbollah and Israel will spread to Middle East oil producers.

US light sweet crude for August delivery CLc1 settled down 88 cents to US$72.66, extending a slide that has cut more than 7 per cent from the price since Friday's record of US$78.40 a barrel. London Brent crude LCOc1 gave up 46 cents to US$73.90.

Crude weakened on Wednesday after US government data showed petrol inventories rose by 1.5 million barrels last week, while overall crude stocks increased by 200,000 barrels.

Analysts had predicted petrol stocks would decline by 700,000 barrels as Americans hit the road for summer vacations. Crude stocks were expected to fall by half a million barrels.

The US data showed strong petrol demand at 9.59 million barrels per day over the past four weeks, up 1.9 per cent from a year earlier.

"Oil is collapsing on the (bearish) EIA numbers ... continuing the profit-taking scenario we're seeing for the third day in a row," said Scott Meyers, senior trading analyst at Pioneer Futures in New York.

The selling added to a decline of more than a dollar on Tuesday after US Secretary of State Condoleezza Rice said there should be a cease-fire between Israel and Hizbollah soon, although she also said conditions had to be conducive.

MARKETS WELL-SUPPLIED

Although the Middle East situation was helping to drive volatility on commodity markets, Francisco Blanch, head of commodity research at Merrill Lynch, said supply and demand factors would eventually reassert themselves.

"Our call is for prices to decline toward the mid-60s (beyond the immediate term), but we don't think (US crude) and Brent are going to collapse" Blanch said. "The fact is the crude oil market is well supplied."

Blanch also noted that oil was still flowing from Syria and Iran, regarded as allies of Hizbollah.

Opec member Iran, which funded and supplied Hizbollah during the 1980s but has denied providing weapons in the latest round of violence, was already a focus of international tension because of a row with the West over its nuclear programme.

Opec President Edmund Daukoru said on Wednesday that current price levels risked damaging the world economy.

"If it would have stabilized around the mid-60s, I don't think people would complain too much. We are getting used to that, but the latest shootup to the mid-70s and above is very uncomfortable," Daukoru told Reuters.

Daukoru, also Nigeria's minister of state for oil, is traveling to the Middle East Gulf next week to address internal Opec issues as well as the oil market situation.

In Washington, Federal Reserve Chairman Ben Bernanke said the central bank was worried about expensive oil.

"Persistently higher inflation would erode the performance of the real economy and would be costly to reverse," he said in a testimony for delivery to the Senate Banking Committee. (Additional reporting by Felicia Loo in Singapore and Barbara Lewis in London)

- REUTERS