Oil falls to near $78 amid China, inventory fears

[February 04, 2010]  KUALA LUMPUR, Malaysia (AP) -- Oil prices fell to near $78 a barrel Wednesday in Asia amid expectations of a dismal U.S. crude inventory report and fears of more lending curbs in China.

Benchmark crude for February delivery fell 76 cents to $78.26 a barrel at late afternoon Kuala Lumpur time in electronic trading on the New York Mercantile Exchange. The contract rose $1.02 to settle at $79.02 on Tuesday.

Crude's sharp rise Tuesday was driven by the Dow Jones industrials' 1.1 percent gain but fundamentally, the oil market remains weak and investors are cashing out, said Victor Shum, an energy analyst with consultancy Purvin & Gertz in Singapore.

"The rise in oil prices was overdone so we are seeing some pullback, primarily also because of expectations that the U.S. government weekly report will show increases in oil inventories," Shum said.

A rise in inventories would suggest demand for oil remains weak. The Energy Department's Energy Information Administration plans to announce its inventory report later Wednesday.

Another negative cue for crude came from Asian stock markets which mostly fell Wednesday amid reports that China had ordered some banks to cease lending for the rest of January after exceeding credit limits. That raised fears China's economic recovery and demand for crude could wane.

Oil prices were also held in check after the Organization of Petroleum Exporting Countries, which supplies roughly 35 percent of the world's crude, kept its 2010 forecast of oil demand steady at 85.15 million barrels a day. OPEC said Tuesday that oil inventories remain at high levels and are enough to handle any unexpected increase in demand.

Shum said oil prices were likely to trade between $77 and $83 a barrel in the near term.

He said uppcoming corporate earnings reports in the U.S. could temper a weak inventory report and steer prices higher if results are stronger-than-expected.

So far, earnings have been mixed, with better-than-expected results from the likes of Intel Corp. offset by disappointments elsewhere most notably Alcoa Inc.

In other Nymex trading in February contracts, heating oil fell 1.8 cent to $2.027 a gallon, while gasoline dropped 1.3 cent to $2.046 a gallon. Natural gas futures rose 4.3 cents to $5.60 per 1,000 cubic feet.

In London, Brent crude for March delivery shed 66 cents to $76.99 a barrel on the ICE Futures exchange.

[Associated Press; By EILEEN NG]

Copyright 2010 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.