UPDATE 11-Oil dives as supply rises, Saudi talk spooks funds

Wed Sep 19, 2012 5:27pm EDT

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By Robert Gibbons and Jonathan Leff

NEW YORK, Sept 19 (Reuters) - Oil prices slumped on Wednesday as Saudi efforts to tame prices and a massive rise in U.S. crude inventories after Hurricane Isaac fuelled a third day of heavy fund liquidation, one of the biggest sell-offs in more than a year.

European benchmark Brent crude crashed below the 50- and 200-day moving-average, sparking technical selling that pushed it to the lowest in six weeks. Big hedge funds were seen liquidating bullish positions built ahead of the Federal Reserves' third dose of stimulus, announced last week.

The rout began late on Monday with an abrupt flash crash triggered by a large sell order from a macro-fund, traders say.

Prices declined the next two days, taking this week's slide to more than 7 percent after a Gulf source said Saudi Arabia would act to lower prices that hit four-month peaks on Friday.

"People are thinking that maybe the Saudis are going to produce more, and some funds are taking the opportunity to liquidate positions," said Christopher Bellew at Jefferies Bache.

Prices received more pressure on Wednesday after U.S. Energy Information Administration (EIA) data showed crude oil stockpiles jumped 8.5 million barrels, far more than expected.

Brent November crude fell $3.84, or 3.4 percent, to settle at $108.19 a barrel, having recovered from a session trough of $107.40, the lowest since Aug. 3.

Brent's three-day drop was 7.26 percent based on settlements, the biggest since a 7.73 percent dive in early June. That, in turn, was the biggest percentage three-day slide since August, 2011.

U.S. October crude, which expires on Thursday, fell $3.31, or 3.47 percent, to settle at $91.98 a barrel after dropping below the 50-day moving average of $93.08. U.S. November crude fell $3.32, to $92.30 a barrel.

Total Brent trading volume was 47 percent above the 30-day average, with U.S. crude turnover 40 percent above its 30-day average.

U.S. heating oil and RBOB gasoline futures joined in the retreat, dropping more than 2 percent.

Gasoline settled at $2.8286 a gallon, a 7.04-cent drop that pulled it below its 100-day moving average. The $2.8031 session low was the lowest since Aug. 1.

Gasoline stocks fell 1.41 million barrels last week, while total distillate inventories dipped 322,000 barrels, the EIA's weekly report said.

U.S. distillate demand over the four-weeks to Sept. 14 was down 11.2 percent versus the year-ago period, the EIA said.

AFTER SPR TALK, MARKET EYES SAUDIS

Oil traders had worried for weeks about the possibility that the U.S. government could tap strategic oil reserves to address the threat to economic growth from surging prices.

Oil came under more pressure on Tuesday when a senior Gulf source said Saudi Arabia is working to lower oil prices, producing around 10 million barrels per day.

Ali al-Naimi, Saudi Arabia's oil minister, had said on Sept. 10 that OPEC's top exporter was worried about high oil price and would take steps to moderate them.

"The straw that broke the camel's back here is the Saudi news yesterday," said Freepoint Commodities analyst Brison Bickerton. "Any time the market's had a long run with traders building bullish positions over a number of weeks you're more likely to get a reversal."

In the past 10 weeks, big speculators and hedge funds added nearly 100,000 net long positions -- equivalent to 100 million barrels -- in U.S. crude oil and options futures contracts. It was one of the biggest and fastest such build-ups since 2010, data show.

Crude prices got a brief boost early on Wednesday when Japan followed the U.S. Federal Reserve's stimulus with its own decision to ease monetary policy by boosting asset purchases in the face of a slowing global economy.

But oil industry sources said concerns about debt-laden Spain's finances and the possibility of Spain requesting a bailout pulled oil back. (Additional reporting by Simon Falush in London and Luke Pachymuthu in Singapore; Editing by Marguerita Choy, David Gregorio and Bob Burgdorfer)

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