Oil fell more than $1 today to below $80 a barrel, after an industry group reported an unexpected increase in US distillate inventories, adding to growing fuel supplies despite the severe winter.
Prices also declined after China surprised world markets by raising banks' reserve requirements, the strongest of a series of step towards tightening monetary policy, raising concern that such cooling off measures would damp energy demand.
US crude for February delivery fell as much as $1.01 a barrel to $79.78, the lowest since January 4th. It was trading down 93 cents at $79.86 a barrel by 0338 GMT.
London Brent crude for February shed 82 cents to $78.48 a barrel.
"The market is trading in the $75-$85 range, and if we are getting warmer weather, higher inventories and Chinese monetary policy is changing, then we should now try the lower side of that range," said Keichi Sano, general manager of research at SCM Securities in Tokyo.
China raised the proportion of deposits that banks must hold in reserve by 0.5 percentage point in a move to stem inflation threats.
Concerns that Chinese tightening could limit the global economic recovery unnerved financial markets, denting stocks, higher-yielding currencies and commodities.
Gold, which slid more than 2 per cent the previous day - the largest one-day percentage drop since December 17th on China's tightening moves - was flat today.
"The Chinese economy is an extraordinary buyer of commodities and energy, so people are very concerned about its growth pace," Sano said.
Distillate stockpiles in the United States rose by 3.6 million barrels in the week ended January 8th, the American Petroleum Institute (API) said yesterday, versus forecasts for a 1.8 million-barrel drop.
The rise came despite the freezing weather in the past two weeks. And a weather pattern change during the next several days will end the very cold weather across central and eastern United States, DTN Meteorlogix said, reducing heating demand.
Crude inventories gained 1.2 million barrels as imports increased, while gasoline stocks soared by a hefty 6.8 million barrels, compared with expectations for a 1.2 million-barrel increase.
Government inventory statistics from the Energy Information Administration (EIA) will be published by 3.30pm.
Deutsche Bank, in a research note, said it expected fundamentals of oil supply, demand and inventories - which remain well above five-year averages - to assert heavier influence on prices in 2010, tempering any price rallies.
"In our view, this would mean that rallies in the oil price above $80 a barrel will only become sustainable in 2011," Deutsche said in a 2010 commodities outlook.
The EIA, in a monthly report yesterday, cut a previous forecast for world oil demand growth in 2010 by 20,000 barrels per day (bpd), although it still predicts demand growth of 1.08 million bpd versus last year.
Reuters