Oil under $78 on dollar gains, inventory fears

LONDON: Oil prices fell below $78 a barrel Wednesday amid expectations of a bearish U.S. crude inventory report, fears of more lending curbs in China and a stronger dollar.

By early afternoon in Europe, benchmark crude for February delivery was down $1.37 to $77.65 a barrel 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 benchmark inventory report later Wednesday.

Another negative cue for crude came from 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.

"The release of GDP and other (Chinese) economic data tomorrow will have to be very bullish to offset this," said JBC Energy in Vienna.

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 upcoming 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.

Gains by the dollar contributed to weigh on crude prices, making oil more expensive for investors holding weaker currencies.

The euro was down to $1.4141 from the $1.4292 late Tuesday in New York, while the British pound was also lower, at $1.6271 from $1.6361.

In other Nymex trading in February contracts, heating oil fell 2.79 cents to $2.0175 a gallon, while gasoline dropped 1.96 cents to $2.0395 a gallon. Natural gas futures lost 3.5 cents to $5.522 per 1,000 cubic feet.

In London, Brent crude for March delivery shed $1.26 to $76.37 a barrel on the ICE Futures exchange.