Oil falls on surprise stock build, soft demand : US Business

By Richard Valdmanis

NEW YORK (Reuters) - Crude oil prices dropped sharply for a second day on Wednesday after a U.S. government report showed a surprise increase in inventories and continued weak demand in the world's top consumer nation.

The decline in prices, which marked the biggest two-day loss in percentage terms since January 2007, helped stocks on Wall Street regain some of the ground lost in recent days on fears over the health of the U.S. banking sector.

U.S. crude futures fell $4.14 to settle at $134.60 a barrel, adding to Tuesday's drop of $6.44 and bringing oil close to $13 below last week's all-time peak. London Brent crude fell $2.56 to $136.19 a barrel.

Wednesday's losses came after the U.S. Energy Information Administration reported crude inventories rose by 3.0 million barrels last week -- countering expectations for a decline -- alongside builds in gasoline and distillate stocks.

"The EIA builds across the board are the most bearish inventory data we have seen in a long while," said John Kilduff, senior vice president of MF Global in New York.

The widely watched government report also showed U.S. oil products demand running 2.0 percent below year-ago levels, another sign that soaring prices are cutting into consumer demand for fuel.

Adding to pressure on oil prices, a senior U.S. official said Tuesday the United States was planning to send an envoy to talks this weekend between Iran and major powers over Tehran's nuclear program.

Washington had said previously it would not be involved in any pre-negotiations with Iran unless it gave up nuclear enrichment, and the tensions between the OPEC-member and the West have helped drive up crude oil prices.

Investors have pumped cash into oil and other commodities this year, looking to hedge against inflation and the weak dollar, which has contributed to a 50 percent oil price rally this year to a record above $147 a barrel this month.

Saudi Arabia, the world's top oil exporter, wants to see lower oil prices, Saudi King Abdullah said in an interview with an Italian newspaper.

"When the price of oil hovered around $100 a barrel, we were already unhappy. Imagine what we feel now, when there is talk of $200," he said.

Oil's six-year rally has also been driven partly by ballooning demand from developing economies such as China and India.

An oil worker strike in Brazil this week was not significantly affecting oil production levels, Brazil's state oil company Petrobras said Tuesday.

(Additional reporting by Jane Merriman in London and Luke Pachymuthu in Singapore; Editing by Christian Wiessner)

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