Oil sinks on surge in U.S. crude

Oil sinks on surge in U.S. crude

Reuters, London

Oil prices fell for a second straight session Wednesday on an unexpected jump in U.S. oil inventories, countering forecasts of leaner supply.

International benchmark Brent crude oil fell 36 cents to US$26.10 per barrel by midday in London, while U.S. crude futures slipped 41 cents to $26.88.

Prices were already weaker on Tuesday after Israel withdrew its troops from the West Bank city Hebron, raising speculation that Iraq may end an oil export embargo in support of the Palestinians.

Data published by the American Petroleum Institute showed crude oil imports to the United States hit a six-month high of 10 million barrels per day last week.

Traders had predicted a fall due to recent disruptions in Venezuela and Iraq, which are leading suppliers to the world's biggest energy consumer.

"There is little doubt that the API report is bearish... but the Middle East is still a dominant factor in sentiment," said Lawrence Eagles of brokers GNI Research.

Baghdad has said it will review its embargo on May 7, a month after it began, and will lift it if Israel makes an unconditional withdrawal from Palestinian controlled areas.

Oil prices have jumped by a third since the beginning of this year as futures markets factored in a premium reflecting the risk of the crisis spreading into the oil-rich Gulf region.

Israeli troops have pulled out of most West Bank cities but still surround Palestinian President Yasser Arafat's compound in Ramallah and the Church of Nativity in Bethlehem, where some 30 gunmen are holed up.

Despite the surprise jump in U.S. stocks last week, Mike Rothman of investment bank Merrill Lynch said he saw the first signs of tightening supply.

"Depending upon the duration of Baghdad's self imposed export hiccup... we're looking at the prospect of a large portion of the stock build-up that took place earlier this year being greatly reduced," he said.

Global stocks of oil built up at the beginning of the year because an unusually warm winter in the northern hemisphere combined with the economic slowdown to hit demand.

Even if the Israeli-Palestinian conflict eases, oil traders see further potential for disruption to Iraqi supplies.

Baghdad and the United Nations are due to start talks on weapons inspectors returning to Iraq on Wednesday, and the Security Council is expected to vote this week on a renewal of Iraq's oil-for-food deal under which it exports almost two million barrels of oil daily.

"There seems to be a reasonable risk that Iraqi oil flows could remain lower than forecast," Rothman said.