Oil: Prices slide 3 per cent on swelling US stockpiles

NEW YORK - Oil prices dropped 3 per cent on Thursday as rising crude stockpiles in the United States, the world's largest energy consumer, countered concerns over strong global demand.

Big money speculators, who are behind mammoth gains in the oil and commodities markets this year, unwound their long positions -- leading some analysts to wonder if the oil rally had finally peaked.

"This is it. This is the dam break," said Ed Silliere, analyst at Energy Merchant Intermarket Futures. "I'd have to say the bull market is done. "

US light crude settled down US$1.74 to US$54.11 a barrel, more than US$4 below Monday's record US$58.28. London Brent crude fell US$1.23 to US$54.04 a barrel.

US crude prices have surged about 25 per cent this year, driven by concerns that rapidly rising energy demand in Asia's emerging economies, especially China and India, could outpace supply growth.

But the red-hot prices have attracted a tide of imports to the United States, building the nation's stockpiles to their highest in nearly three years and raising the possibility of a market reversal.

"Crude inventories are not tight enough to justify current prices," said J.P. Morgan bank in a report.

Federal Reserve Chairman Alan Greenspan said earlier this week that high oil prices could slow demand and encourage enough stockpiling to cool the recent "frenzy" that sent prices to record highs.

Petrol stockpiles in the United States, which tend to take the spotlight in the run up to the summer driving season, are also running at a solid year-on-year surplus despite recent weekly declines that pulled them from a six-year high.

Petrol futures in New York dropped more than 9 cents a gallon Thursday to just under US$1.57.

"The perception is that because refiners operated at nearly 94 per cent of capacity last week, if petrol imports rise, petrol supply worries for the summer would be eased," said Phil Flynn, analyst at Alaron Trading.

THREAT LINGERS

High prices for oil still pose a serious threat to the global economy in coming years, the International Monetary Fund said in a report on Thursday.

China's growing thirst for petroleum and shrinking spare production capacity will keep oil prices volatile through 2030, with the possibility of spikes as high as US$100.

"In short, it will continue to be a rocky ride going forward, with a wide band of uncertainty surrounding high expected prices," said Raghuram Rajan, the IMF's chief economist.

Top world oil exporter Saudi Arabia has said it wants to help build world stockpiles up in time for an expected fourth-quarter surge in demand this year.

The kingdom cut its official crude prices to European and US customers this week to make its lower-quality oil more attractive to buyers.

Saudi Arabia is the biggest producer in the Organisation of the Petroleum Exporting Countries, which raised output limits by 500,000 barrels per day (bpd) last month to 27.5 million bpd in a bid to cool prices.

Opec left room for a second 500,000 bpd increase before a June meeting if prices failed to drop below US$55. The group began talks on the second increase last weekend and said then they could decide within two weeks.

Saudi Arabia itself produced nearly 9.4 million bpd last month, a Reuters survey showed. Some dealers believe the kingdom will struggle to place much more oil without further cuts to its own selling prices.

- REUTERS