| NEW YORK
NEW YORK Oil dropped nearly 2 percent on Tuesday as Saudi Arabia sought to knock back crude's price rise that has threatened the global economy, with the oil minister offering the most detailed argument to date that the OPEC nation was prepared to meet any supply shortfall.
Saudi Arabian Oil Minister Ali al-Naimi said the kingdom was pumping 9.9 million barrels per day -- the most in decades -- supplying every customer request, and was willing to turn the taps to the maximum 12.5 million bpd immediately if needed.
The kingdom, which has tried to calm oil markets on edge about the potential loss of Iranian supplies this year, has filled storage levels outside the country to 10 million barrels to help build a cushion for markets.
"My only mission is to convey to you that there is no supply shortage in the market," Naimi told a media briefing in Doha, Qatar, adding supplies were now outpacing global demand by more than 1 million bpd and that current prices were "unjustifiable".
"We are ready and willing to put more oil on the market, but you need a buyer."
Oil prices have risen 15 percent this year as U.S. and European sanctions aimed at ending Iran's nuclear ambitions have prompted Tehran to threaten to close the Strait of Hormuz shipping lane.
Oil fell early in the day after Sheikh Sabah al-Ahmad al-Sabah, ruler of Kuwait, said Iranian officials had assured his country that Tehran would not close the strait, through which 35 percent of global crude sea-borne shipments passes.
Brent crude settled at $124.12 a barrel, down $1.59 on the day and off earlier lows of $123.20. U.S. crude fell $2.48 to settle at $105.61 a barrel.
"Crude prices are down as the Saudis are assuring global markets that they have all the oil available for anybody who wants to buy," said Gene McGillian, analyst for Tradition Energy in Stamford, Connecticut.
"This follows recent news that Saudi production is stronger and that a large number of VLCCs (very large crude carriers) are headed from the Middle East to the U.S."
Saudi shipments to the United States have jumped 25 percent this year and were expected to increase even more in coming months. U.S. Treasury Secretary Timothy Geithner said the Obama administration welcomed the OPEC kingpin's decision to fill any supply gap created by loss of Iranian crude.
Saudi Arabia is the only country with large amounts of spare oil production capacity available to help compensate for global disruptions.
PDF of Iran reports: link.reuters.com/duf27s
China fuel prices vs U.S. crude prices:
The spike in oil and gasoline prices has become a key theme this U.S. election year, and the White House is mulling ways to bring prices down, including a possible release of oil reserves from strategic stockpiles.
Sources told Reuters last week that Britain had decided to cooperate with the United States in a bilateral agreement to release stocks, in an effort to prevent high fuel prices derailing economic growth.
But prices pared losses early on Tuesday after France and Germany came out in opposition of an emergency release from their oil stockpiles. Last year, an emergency inventory release aimed at making up for Libyan supplies disrupted by the Libyan civil war was agreed by the 28-member, Paris-based International Energy Agency.
Additional pressure on prices came after a senior official with Libya's National Oil Corporation said exports were set to exceed prewar levels.
"We have been seeing articles about increases in Saudi supply offsetting a reduction in Iranian oil since Friday," said Tony Machacek, an oil futures broker at Jefferies Bache Ltd.
"But now combined with Libya coming back up and running and weak Chinese demand, it is all contributing."
China said it was raising retail gasoline and diesel prices by 6 to 7 percent, the biggest increase in nearly three years, which analysts say could curb demand growth.
Data from the American Petroleum Institute on U.S. inventory levels released late on Tuesday showed an unexpected 1.4-million-barrel decline in crude stockpiles last week. The market will now await inventory data from the U.S. Energy Information Administration on Wednesday for confirmation of the drawdown.
(Reporting by Matthew Robinson, Robert Gibbons, and Gene Ramos in New York; Drazen Jorgic and Jessica Donati in London, Francis Kan and Florence Tan in Singapore; Editing by David Gregorio, Marguerita Choy and Dale Hudson)