Oil prices drop as US stocks rise

Rising US crude oil reserves signal that demand is continuing to weaken

Oil prices dropped sharply as US crude oil stocks rose more than had been expected - suggesting demand for energy has eroded even further.

US light, sweet crude fell $5.95 to $42.63 a barrel in New York - ending a week of gains.

Earlier in London, Brent crude oil fell $4.67 to $45.86 a barrel.

Oil prices had been rising because of the Gaza crisis and apparent halting of Russian gas exports to Europe via Ukraine amid a dispute.

Investors have been concerned that the fighting between Israel and Hamas in Gaza could spread to the rest of oil-rich Middle East and affect supplies.

Rising reserves

However the unexpectedly large rise in US crude oil stocks has once again underlined the significance of weakening consumer demand for oil.

Demand for oil appears to remain weak as traders are seeking as many as 10 supertankers to store crude Addison Armstrong, Tradition Energy

The Energy Information Administration said US crude oil stocks had risen by 6.7m barrels instead of the expected figure of 1.5m barrels.

Jim Ritterbusch of energy consultants Ritterbusch and Associates said:

"This will take a lot of steam out of the geopolitical argument that this Russian-Ukraine standoff is going to disrupt supplies appreciably.

"This report's telling us that we've got a big supply cushion out there that can easily absorb a temporary curtailment of European supply."

Crude prices dropped alongside Wall Street, where the Dow ended down 2.7% on Wednesday.

Bleak trading statements from Time Warner, Intel and news of Alcoa's job cuts combined with more evidence of rising unemployment have undercut expectations that demand for energy will rebound further.

"This has been a speculatively led rally here in the past couple of weeks," said Mr Ritterbusch.

"It didn't have a lot of fundamental impetus behind it, and now we're getting evidence that there's a lot more crude and product supply out there than what we thought."

Supertanker storage

Demand for gasoline, or petrol, also appeared to be falling. US gasoline inventories rose by 3.3m barrels, more than twice what analysts had expected.

US gasoline consumption is falling, according to the weekly report by MasterCard .

Consumption last week was down 3.5% compared with the same week a year ago.

Tom Kloza at Oil Price Information Service, said the sharp drop in prices was not necessarily surprising:

"It doesn't necessarily mean that we've seen this sea change or this tremendous shift in sentiment on trend.

"It's just illustrative of sort of this incredible kind of irregular heartbeat that commodities have displayed probably since November."

Crude oil has now become so cheap, it is being stored at sea to avoid selling it at current market prices.

"Demand for oil appears to remain weak as traders are seeking as many as 10 supertankers to store crude," said Addison Armstrong at Tradition Energy.

"The carriers hold about 2 million barrels of crude and traders are seeking to lease the ships for three to nine months," he said.