Oil drops below $61 as big rally pauses

[May 21, 2009]  NEW YORK (AP) -- Oil prices eased off six-month highs Thursday after rallying the day before to above $62 a barrel on a bigger-than-expected fall in U.S. crude inventories.

Benchmark crude for July delivery was down $1.23 to $60.81 a barrel by midday in Europe in electronic trading on the New York Mercantile Exchange.

In London, Brent prices fell $1.17 to $59.42 a barrel on the ICE Futures exchange.

Oil has surged about 75 percent since March on signs the global economy, while still struggling through a severe slowdown, may have avoided a worst-case scenario.

On Wednesday, the July contract rose $1.94 to settle at $62.04 after the government said U.S. crude inventories fell for a second week, suggesting demand may be improving.

Crude stockpiles dropped by 2.1 million barrels for the week ended May 15, according to Energy Department's Energy Information Administration. Gasoline inventories dropped by 4.3 million barrels.

That was a bigger decline than analysts had expected, especially for gasoline. Still, oil supplies remain at 19-year highs, and some analysts question whether the recent jump in prices is justified when demand remains weak.

"The inventory data is looking better but demand is still soft," said David Moore, commodity strategist at Commonwealth Bank of Australia in Sydney. "To my mind, the oil price has risen prematurely and ahead of fundamentals."

Moore's comments were echoed by JBC Energy in Vienna, which predicted a "temporary downward correction on the horizon for the oil price."

"Crude fundamentals are dramatically out of sync. At present, supply is still far exceeding demand," JBC said.

The oil rally has mirrored gains in stocks as investors bet the worst of the global economic downturn may be over.

"There's a broadly less pessimistic view of the international outlook, which is encouraging people to get into oil," Moore said.

Renewed clashes between government troops and militants in Nigeria, part of a long-standing dispute over the distribution of oil revenues from the Niger Delta, continued to support oil prices.

According to JBC Energy, the situation in the Niger Delta "appears to be worsening." JBC estimated that output in Africa's largest crude exporter was down 900,000 barrels a day since the escalation of militant activity in the summer of 2005.

In other Nymex trading, gasoline for June delivery fell 3.45 cents to $1.7750 a gallon and heating oil dropped 3.74 cents to $1.5037 a gallon. Natural gas for June delivery slid 7.3 cents to $3.897 per 1,000 cubic feet.

[Associated Press; By PABLO GORONDI]

Associated Press writer Alex Kennedy contributed to this report from Singapore.

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