Oil falls as weak demand outlook trumps IMF hopes

Oil rigs are seen on Lake Maracaibo from the shore in Cabimas, in Venezuela's western state of Zulia February 28, 2011.

NEW YORK (Reuters) - Brent crude oil futures dropped back on Wednesday as a weak demand outlook overshadowed hopes the International Monetary Fund would be able to raise more money to help resolve Europe's debt crisis.

U.S. crude futures retreated, after being up earlier, on news the Obama administration was to reject TransCanada's (TRP.TO) $7 billion Canada-to-Texas Keystone crude oil pipeline project, analysts said. After the market closed, the administration announced the rejection of the project.

The sell-off developed on the perception that without the pipeline crude stockpiles at the key NYMEX delivery point in Cushing, Oklahoma, would remain glutted and pressure prices.

"NYMEX crude pulled back on that news, but U.S. crude futures have also fallen as it is testing support around $100, after rising on concerns about disruption of supply from Iran," said Chris Dillman, analyst at Tradition Energy in Stamford, Connecticut.

While the weight of weak global demand may have pulled down Brent oil futures, the assumption that a competing Seaway pipeline project - or other projects - will go ahead likely calmed what could have been a turbulent trading day.

The Keystone pipeline was planned to deliver crude from Alberta's oil sands to Texas refineries. But environmentalists strongly oppose the project because of its route, concerns about spills and carbon emissions from production of oil sands crude.

TransCanada later issued a statement saying it had received notice of the rejection. It said it would reapply and hoped for approval to allow for an in-service date of late 2014.

U.S. crude had gained earlier as gasoline futures jumped to a three-month high on news the 350,000-barrel-per-day Hovensa LLC refinery in St. Croix, U.S. Virgin Islands, would be shut mid-February due to heavy losses caused by low refinery margins.

In London, ICE Brent crude for March delivery settled at $110.66 a barrel, falling 87 cents, after touching a session high of $112.20.

U.S. crude for February delivery closed at $100.59, edging down 12 cents, after rising to a session high of $102.06. February RBOB gasoline ended up 5.41 cents at $2.8254 a gallon, after surging 2.94 percent to a session peak of $2.8529, the highest intraday since October 17.

In post-settlement trading, a report from industry group American Petroleum Institute that U.S. crude inventories fell 4.8 million barrels last week, against the forecast in a Reuters poll that stockpiles rose 2.8 million barrels, helped pull up futures prices. By 4:50 p.m. EST (2150 GMT), February crude was up 41 cents at $101.12.

Brent crude's total trading volume rose 23 percent against the 30-day average, according to Reuters data. U.S. crude total volume increased 26 percent from the 30-day average.

Oil futures and other riskier assets gained in early trade after reports said the IMF is proposing to increase its lending pool by up to $600 billion to lend to nations battling with the fallout from the euro zone debt crisis.

But this was overshadowed by a report from the Paris-based International Energy Agency, which cut its 2012 demand growth forecast by 220,000 barrels per day (bpd) from its previous monthly report, to 1.1 million bpd.

IEA, the energy policy adviser to 28 industrialized nations, said oil demand is falling for the first time since the global economic crisis of 2008-2009, as demand in the last quarter of 2011 fell 300,000 bpd to 89.5 million bpd.

It cited mild winter weather, the European debt crisis and high oil prices for the fourth quarter demand drop.

The U.S. Energy Information Agency will release its crude report on Thursday at 11 a.m. EST (1600 GMT).

EURO ZONE WORRIES, IRAN SUPPLY THREAT

Concerns about the euro zone debt crisis persisted as markets awaited results of a meeting between international creditors and the Greek government on bond swap deal.

After a two-hour meeting, Greek Finance Minister said the talks will continue on Thursday, though sources expressed hope a deal could be struck in the coming days.

A deal with the private sector is seen as a key if cash-strapped Greece is to avoid going bankrupt when 14.5 billion euros ($18.5 billion) in bond redemptions fall due in late March.

Meanwhile, fears about supply disruption from Iran eased somewhat after Israel Defense Minister Ehud Barak said any decision about an Israeli attack on Iran was "very far off."

Barak's remark, aired on Israel Army Radio, suggested that Iran, which denies trying to make a nuclear bomb while defying international censure of its secretive uranium enrichment and missile projects, has not yet advanced past what Israel might deem a critical threshold.

Iran has threatened to close the vital Strait of Hormuz oil shipping route in the face of sanctions by western governments over its disputed nuclear program.

The European Union would ban the import of Iranian oil from July 1, giving member states nearly six months to end existing contracts under a proposal by Denmark, currently the rotating EU president.

(Additional reporting by Robert Gibbons in New York, Simon Falush in London, Manash Goswami in Singapore; Editing by Marguerita Choy, Sofina Mirza-Reid and Bob Burgdorfer)