Oil drops on fuel stock build, Asia price hike

Source: Agencies  |   2008-6-5  |     ONLINE EDITION

OIL fell below US$123 a barrel yesterday to its lowest in nearly three weeks because of increases in US fuel inventories and a fuel price rise in Asian countries, which is expected to curb demand.

Wednesday's losses added to a more than US$3 slide on Tuesday when the US Federal Reserve warned the weakness of the dollar threatened to stoke inflation.

Prices rose briefly after US government data showed a decline in crude inventories. They soon fell again, responding to increases in stocks such of gasoline, and distillates such as heating oil and diesel.

US crude fell to as low as US$122.57 a barrel, the lowest since mid-May. It was trading US$1.78 lower at US$122.54 a barrel by 1458 GMT. London's Brent crude was trading US$2.13 lower at US$122.45.

Data from the US Energy Information Administration showed crude inventories fell by 4.8 million barrels last week. But gasoline and distillates supplies showed larger-than-expected builds because refineries operated at the highest rate since early January.

"Crude was bullish but products were bearish," a broker said. "Overall sentiment will remain bearish for the moment."

Dollar weakness, which makes dollar-denominated commodities relatively cheap, had been a major factor in oil's rise to a record above US$135 a barrel in May.

The high prices have begun to erode demand and have made the cost of subsidies paid out by governments in emerging economies very hard to bear.

India and Malaysia have decided to raised their domestic fuel prices.

India increased petrol and diesel prices by about 10 percent on Wednesday, the biggest increase in years.

Other Asian countries have already cut or are considering reducing subsidies, with potentially major implications for demand.