Oil falls $3, shrugs off U.S. supply drop

NEW YORK (Reuters) - Oil prices dropped $3 on Thursday as concerns about global energy demand and strength in the dollar countered a government report showing the biggest decline in U.S. stockpiles since 2004.

U.S. crude fell $2.90 to $128.13 a barrel by 12:15 p.m. EDT after trading between $127.64 and $133.12 a barrel. London Brent fell $2.83 to $128.10.

The decline extends oil's retreat from last week's record over $135 a barrel amid growing signs that global energy demand growth is slowing under the strain of high costs and economic turmoil in the United States.

Gains in the U.S. dollar after a report the U.S. economy grew in the first quarter at a faster pace than previously estimated added pressure to commodity markets by diminishing the purchasing power of buyers using other currencies.

Oil had briefly surged into positive territory Thursday morning after the U.S. Energy Information Administration released a report showing an 8.8 million-barrel drop in U.S. crude stockpiles, the biggest fall since a hurricane shut offshore oil platforms in September 2004.

The EIA said the decline was due to delays in tanker movements along the Gulf Coast that bit into imports.

"Once again, on further review, we should not read too much into one week's report from the EIA," said Phil Flynn, analyst at Alaron Trading in Chicago.

Analysts in a Reuters poll had forecast the stock level to be unchanged.

Stockpiles at Cushing, Oklahoma, the delivery point of U.S. crude traded on the New York Mercantile Exchange (NYMEX), increased 700,000 barrels, according to the EIA, tempering the bullishness of the report.

DEMAND SLOWING

The EIA said on Wednesday U.S. oil demand in March fell to the lowest level for that month in five years, the latest sign that consumers are cracking under the strain of high oil prices.

In Britain, gasoline demand in April fell 7 percent from a year ago while diesel demand fell nearly 2 percent, government data showed on Wednesday.

Asian countries have also been reviewing fuel subsidies, which have sheltered drivers from the shock of steep price rises, intensifying fears of an Asian energy demand slowdown.

India's oil minister, Murli Deora, said on Thursday that the government will take a decision on raising fuel prices in the next two to three days.

Taiwan, Indonesia and Sri Lanka have already raised domestic fuel prices.

(Additional reporting by Ikuko Kao in London, Luke Pachymuthu in Singapore; Editing by Marguerita Choy)

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