Oil falls as U.S. crude stocks rise

Unleaded gas price is displayed at JJ's Express Gas Plus station in Phoenix gas station in Phoenix, Arizona August 10, 2011.

NEW YORK (Reuters) - Oil prices fell on Wednesday as concerns about rising U.S. inventories added to caution about Europe's ability to agree on a plan to address the debt crisis.

U.S. oil futures dropped 3 percent, leading the complex lower and widening the contract's discount to European Brent crude by nearly $1, partially retracing two days of heavy selling on the spread.

Prices fell early on jitters ahead of the meeting of euro zone heads of state on the debt crisis, before extending losses on data from the U.S. Energy Information Administration showing a steep build in domestic crude oil inventories last week as imports jumped. <EIA/S>

"The crude build was a lot larger than people expected and you saw rising imports and we have the uncertainty about Europe putting a little uncertainty in the market," said Gene McGillian, energy analyst for Tradition Energy in Stamford, Connecticut.

ICE Brent crude for December fell $2.01 to settle at $108.91 a barrel. U.S. December crude traded down $2.97, settling at $90.20 a barrel.

U.S. crude's backwardation -- when prompt prices trade at a premium to later months -- narrowed in late activity with December crude briefly falling to a discount to January prices in post-settlement trade.

The futures curve had shifted on Monday into backwardation, a bullish signal of supply concerns, for the first time since 2008.

"Monday was a fundamentally driven signal forcing the move into backwardation, but you could see it caught a lot of people by surprise," said Joachim Azria, oil analyst at Credit Suisse in New York.

"A lot of hedge fund managers and money managers were forced to go back into the market as they had been short the Brent-WTI spread -- and at some point they had to do the pain trade and start buying it back."

U.S. STOCKPILES

Further weakness came on news oil output from the Buzzard North Sea, Britain's largest oil field, rose more than expected this month following maintenance added further pressure to prices.

Erratic oil flows from the region, as well as the loss of Libyan output and rising inventories at the Cushing, Oklahoma delivery point of the New York Mercantile Exchange's oil contract sent Brent's premium to U.S. crude to records over $28 earlier this month.

That premium narrowed to below $18 on Tuesday as traders reassessed the U.S. supply situation, including recent drops in Cushing stockpiles.

EIA data released on Wednesday, however, showed inventories at the key hub rose by more than 400,000 barrels in the week to October 21.

Markets cautiously awaited the summit between euro zone leaders in early activity, with stock markets rising on word of plans they will to increase the capacity of their rescue fund to one trillion euros.

(Additional reporting by Matthew Robinson, David Sheppard in New York; Zaida Espana in London and Li Peng in Singapore; Editing by Marguerita Choy)