Thursday May 15, 2008 MYT 12:45:46 PM

Oil prices drop below US$124 a barrel

SINGAPORE (AP) - Oil prices dropped below US$124 a barrel Thursday in Asia after the U.S. government issued a mixed report on the country's petroleum reserves.

The Energy Department said diesel stockpiles there rose last week, and news of the build eased concerns about the fuel used to transport most food and consumer goods. The government also said crude oil inventories were up, but not by as much as expected.

Light, sweet crude for June delivery fell 46 cents to US$123.76 a barrel in Asian electronic trading on the New York Mercantile Exchange by midday in Singapore.

The contract fell US$1.58 to settle at US$124.22 a barrel on Wednesday.

In its report, the Energy Department's Energy Information Administration said inventories of distillates, which include heating oil and diesel fuel, grew 1.4 million barrels last week, 27 percent more than expected. A big draw in the fuel reported a week ago was one of the key factors keeping oil on the record run begun April 5.

However, the EIA also said crude inventories grew just 200,000 barrels, much less than the 2.5 million barrel jump analysts surveyed by research firm Platts had expected, and that gasoline demand fell slightly over the last four weeks.

The EIA reported as well that gasoline supplies fell 1.7 million barrels last week, a little bit more than double what analysts had been expecting. Still, gasoline price fell because of the weakening demand.

"There's no incentive for refiners to make (gasoline) because they're not selling it,'' said Phil Flynn, an analyst at Alaron Trading Corp. in Chicago.

Also pressuring oil prices overnight and Thursday was the dollar, which has strengthened against the euro and yen.

Commodities such as oil lose their appeal as inflation hedges when the dollar rises.

Also, a stronger greenback makes oil more expensive to investors overseas.

Crude oil futures have risen almost 30 percent this year on steadily rising demand in emerging economies, sluggish growth in new supply and unrest in some major producing nations. The Organization of Petroleum Exporting Countries has also stood firm on output policy since loosening it late last year.

President George W. Bush is expected to urge OPEC's top producer, Saudi Arabia, to pump more oil during his visit to the Middle East this week.

Oil prices may be more volatile in coming days as investors square positions ahead of the June contract's expiration next week. In other Nymex trading, heating oil futures rose 0.13 cent to US$3.6191 a gallon (3.8 liters) while gasoline prices fell 1.4 cents to US$3.1664 a gallon. Natural gas futures fell 1.9 cents to US$11.579 per 1,000 cubic feet.

In London, June Brent crude fell 61 cents to US$121.25 a barrel on the ICE Futures exchange.-AP

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