Oil falls on surprise U.S. stock build, soft demand

NEW YORK (Reuters) –

Crude oil prices dropped sharply for a

second day on Wednesday after a U.S. government report showed a

surprise increase in inventories and continued weak demand in

the world’s top consumer nation.

The decline in prices, which marked the biggest two-day

loss in percentage terms since January 2007, helped stocks on

Wall Street regain some of the ground lost in recent days on

fears over the health of the U.S. banking sector.

U.S. crude futures fell $4.39 to $134.35 a barrel by 1:50

p.m., adding to Tuesday’s drop of $6.44 and bringing oil close

to $13 below last week’s all-time peak. London Brent crude fell

$2.33 to $136.42 a barrel.

Wednesday’s losses came after the U.S. Energy Information

Administration reported crude inventories rose by 3.0 million

barrels last week — countering expectations for a decline —

alongside builds in gasoline and distillate stocks.

“The EIA builds across the board are the most bearish

inventory data we’ve seen in a long while,” said John Kilduff,

senior vice president of MF Global in New York.

The widely watched government report also showed U.S. oil

products demand running 2.0 percent below year-ago levels,

another sign that soaring prices are cutting into consumer

demand for fuel.

Adding to pressure on oil prices, a senior U.S. official

said Tuesday the United States was planning to send an envoy to

talks this weekend between Iran and major powers over Tehran’s

nuclear program.

Washington had said previously it would not be involved in

any pre-negotiations with Iran unless it gave up nuclear

enrichment, and the tensions between the OPEC-member and the

West have helped drive up crude oil prices.

Investors have pumped cash into oil and other commodities

this year, looking to hedge against inflation and the weak

dollar, which has contributed to a 50 percent oil price rally

this year to a record above $147 a barrel this month.

Saudi Arabia, the world’s top oil exporter, wants to see

lower oil prices, Saudi King Abdullah said in an interview with

an Italian newspaper.

“When the price of oil hovered around $100 a barrel, we

were already unhappy. Imagine what we feel now, when there is

talk of $200,” he said.

Oil’s six-year rally has also been driven partly by

ballooning demand from developing economies, such as China and

India.

An oil worker strike in Brazil this week was not

significantly affecting oil production levels, Brazil’s state

oil company Petrobras said Tuesday.

(Additional reporting by Jane Merriman in London and Luke

Pachymuthu in Singapore; Editing by Jim Marshall)