Oil drops 2 percent on swelling U.S. inventories

In this file photo customers buy gas in New York as oil prices surged to record high, August 11, 2005. Oil fell more than $1 a barrel on Wednesday after a U.S. government report showed larger than expected increases in crude and gasoline stockpiles in the world's top consumer.

NEW YORK (Reuters) - Oil fell 2 percent on Wednesday as U.S. gasoline stocks rose and crude inventories hit a nine-year high, easing supply concerns in the world's top consumer.

London Brent LCOc1 crude settled down $1.42 to $70.42 a barrel after falling as low as $69.56 earlier. Brent had rallied to a 10-month high of $72.25 on Monday on worries of disruption of supplies from OPEC member Nigeria.

U.S. oil CLc1 gave up 91 cents to $68.19 a barrel after government data showed U.S. crude inventories jumped 6.9 million barrels last week to the highest levels since May 1998 and eclipsing analyst expectations of a 100,000 barrels build.

Gasoline stocks, meanwhile, rose 1.8 million barrels, almost double the market forecast, even as refinery utilization fell unexpectedly in the midst of peak U.S. driving season demand.

"The completely unexpected build in crude stocks is the surprise of the day. And it is very bearish," said Tim Evans, analyst at Citigroup Global Markets.

Oil was down earlier after a general strike in Nigeria had yet to affect oil shipments from the eighth-largest exporter, although fears arose later the strike could soon start to bite.

Unions spared oil production and exports on the first day of the indefinite strike, but threatened to withdraw key staff of sector regulator, the Department of Petroleum Resources (DPR), from oil fields and export terminals by midnight on Wednesday.

"If by tomorrow the situation has not changed, we will pull out members in DPR who are still at the export terminals. When DPR is not there, there will be no export," said Peter Akpatason, head of the NUPENG oil union. nL20302990

The unions have pressed on with the strike despite a series of concessions offered by President Umaru Yar'Adua, who faces the first major test of his government three weeks after taking office.

STILL BULLISH

Despite bulging U.S. crude supplies, some experts said the underlying factors remained bullish.

"Gasoline remains a big driver (and) gasoline in the U.S. remains tight. Going forward, the fundamentals remain well-supported, especially with OPEC and Saudi Arabia not increasing production. Meanwhile there are a lot of geopolitical risks out there, as well as hurricane season coming up," said Mike Wittner, global head of Energy Market Research at investment bank Calyon.

Credit Suisse analysts said the oil price outlook was "tight" in the second half of 2007, supported by supply problems and ongoing demand growth.

"OPEC needs to increase oil output and spare capacity looks tightly held in Saudi Arabia and Kuwait. Were OPEC to keep output unchanged, inventories would fall in the second half of 2007 and hurricane worries will inevitably resurface from August onwards," analysts at the bank said in a research note.

(Additional reporting by Santosh Menon in London, and Neil Chatterjee in Singapore)

(Editing by Matthew Lewis; Reuters Messaging: matthew.robinson.reuters.com@reuters.net; New York newsroom +1 646 223 6052))