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Oil slides on sharp inventory build

OIL fell to a seven-session low today due to a sharp rise in US crude inventories and on a stronger US dollar.

Worries over sovereign debt in Europe led investors out of perceived riskier assets.

Light, sweet crude for May delivery settled $US1.30, or 1.6 per cent, lower at $US80.61 a barrel on the New York Mercantile Exchange. Brent crude on the ICE futures exchange settled $US1.08, or 1.3 per cent, lower at $US79.62 a barrel.

The US Energy Information Administration reported a hefty 7.25 million barrel increase in crude inventories for last week, substantially more than the 1.4 million barrel gain that analysts surveyed by Dow Jones Newswires were expecting.

Oil briefly dropped below $US80 a barrel on the data, but market participants were not entirely surprised by the level of the rise since the American Petroleum Institute, an industry group, had reported in the previous session a 7.5 million barrel increase in crude stocks.

KEY COMMODITY PRICES: gold, base metals, oil, livestock and wheat

The stock build was partly due to an increase in crude imports to their highest weekly total since September. Tim Evans, analyst with Citi Futures Perspective in New York, noted that crude imports may have been bunched up following weather-related delays in recent weeks.

Some of the losses in oil, though, were halted by a greater-than-expected draw in oil product stocks. Petrol inventories fell 2.7 million barrels against expectations of a 1.3 million barrel fall and distillate stocks, that include diesel and heating oil, slipped 2.4 million barrels compared with projections of a 600,000 barrel decline. Refinery processing rates increased 0.5 percentage point to 81.1 per cent of total capacity.

With the US gearing up for the northern summer driving season, more attention is paid to the size of petrol stocks and the level of oil demand.

Total products supplied — a proxy for demand — in the last four weeks averaged 19.4 million barrels a day, a 3.6 per cent increase on a year ago. Petrol demand last week rose 238,000 barrels a day to 9.1 million barrels a day.

Oil prices were also weighed down by sovereign debt woes in Europe. This caused the US dollar to soar to a 10-month high against the euro as investors exited riskier assets and moved into the US dollar. Oil tends to fall on a stronger dollar as it makes the commodity more expensive to buy with other currencies.

"We’re seeing a flight to safety that’s hit commodities across the board, and oil is no exception," said Mike Zarembski, senior commodities analyst with OptionsXpress in Chicago.

Investors were nervous after Fitch Ratings lowered its long-term credit rating for Portugal, adding to fears that the debt crisis in Europe may not be contained.

Investors were less confident in the European Union’s ability to provide a bailout package for Greek debt after France and Germany sought the participation of the International Monetary Fund in offering financial aid to Greece. The EU will meet tonight (AEDT) for a two-day summit.

Traders were also monitoring news that top oil producer Saudi Arabia had arrested 113 al Qaeda-linked militants accused of plotting attacks on oil facilities and security sites in the kingdom, state-run Saudi Press Agency reported.