Oil slips on natural gas stockbuild

NEW YORK (Reuters) - Oil prices fell Thursday as a big increase in U.S. natural gas stocks weighed on the energy complex, spurring profit-taking from recent highs.

U.S. crude settled down 10 cents at $124.12 a barrel, after dipping as low as $120.75 a barrel earlier.

London Brent crude settled 61 cents lower at $121.25 a barrel, after a power glitch halted trade was on the InterContinental Exchange platform for more than three hours.

"Natural gas gave us a negative tone at the start of the day. There's also likely a lot of people trying to get out of positions and lock in some profits," said Phil Flynn, an analyst at Alaron Trading in Chicago.

Natural gas futures fell 2 percent after a U.S. government report showed a larger-than-expected increase in stockpiles last week.

The losses added to oil's $1.58 retreat Wednesday, which was prompted a bigger-than-expected rise last week in distillate stocks, easing concerns about tight diesel markets that sent heating oil and gas oil futures to record highs this week.

Oil prices, which also hit a record this week just below $127 a barrel, have jumped six-fold since 2002, propelled by surging demand in China and other developing nations.

Some support came as the dollar weakened against the euro on Thursday, after data showing U.S. industrial production fell 0.7 percent in April, reflecting the biggest drop in the manufacturing sector since September 2005.

Oil and the U.S. currency have become closely intertwined in recent months as investors have turned to oil as a hedge against the falling dollar.

SAUDI VIEW

Rising fuel costs have hit the economies of consumer nations, such as the United States, which already has been hit hard by the global credit crunch.

The Organization of Petroleum Exporting Countries has rebuffed repeated calls from consumers to increase output, however, blaming the weak dollar and speculative inflows into commodities for high prices.

Oil's rise has more to do with financial market volatility than fundamentals, Ali al-Naimi, oil minister of OPEC kingpin Saudi Arabia, said on Thursday, according to the text of a speech obtained by Reuters.

"The short-term oil price gyrations seen in recent years are more closely tied to the internal logic of the financial markets than to underlying supply/demand fundamentals," Naimi said.

OPEC's Monthly Oil Market Report provided more evidence that record oil prices are slowing demand growth, lowering its forecast for world demand growth to 1.16 million barrels per day, 40,000 bpd less than its previous forecast.

Investment bank UBS raised its projection for oil prices on Thursday to $115 a barrel for 2008.

The forecast for this year is the most bullish among banks polled by Reuters. UBS previously was the most bearish forecaster in a poll on April 25.

(Reporting by Richard Valdmanis and Matthew Robinson in New York; Additional reporting by Jane Merriman; Editing by Walter Bagley) and Alex Lawler in London, Maryelle Demongeot in Singapore)