Oil down 4 percent; U.S. stockpile build threatens market recovery

By Barani Krishnan

NEW YORK (Reuters) - Oil prices tumbled 4 percent on Wednesday, with U.S crude settling below the key $40 per barrel mark after a sixth straight week of record highs in stockpiles that traders warned could cut short the market's two-month long rally.

Weak equity markets also sapped the strength in oil while a strong dollar weighed on demand for crude from users of the euro and other currencies. [.N] [FRX/]

The U.S. government's Energy Information Administration (EIA) said crude stockpiles rose 9.4 million barrels last week - three times the 3.1 million barrels build forecast by analysts in a Reuters poll. [EIA/S]

"The data will do little to help oil bulls, given the monster build for crude inventories already at record high levels prior to this," said Chris Jarvis, analyst at Caprock Risk Management in Frederick, Maryland.

U.S. crude futures settled down $1.66, or 4 percent, at $39.79 a barrel. It was the sharpest one-day drop for the front-month contract in U.S. crude since Feb. 11, when prices fell to a 12-year low of $26.05.

Brent crude futures finished down $1.32, or 3.2 percent, at $40.47 a barrel.

Oil prices have rallied about 50 percent over the past two months. While declining U.S. oil output and strong gasoline demand drove some of the gains, the bulk was powered by OPEC and other major producers' plans to freeze production at January's highs.

"A recovery built on fickle risk appetite and temporary supply disruptions has gotten ahead of itself, and a pullback is expected," said Mike Wittner, global head of oil research at Societe Generale.

Some traders such as Tariq Zahir at Tyche Capital Advisors in New York were betting nearer-dated U.S. oil contracts would weaken versus longer-dated ones, expanding the market's so-called "contango" structure. "The rally, in our opinion, has run its course for now," Zahir said.

Trading houses such as Vitol, Gunvor and Glencore were betting on oil remaining oversupplied at least until 2018.

The EIA data was not entirely negative, showing gasoline stocks falling three times more than forecast and four-week demand for the motor fuel up 7 percent year-on-year.

Crude stockpiles at the Cushing, Oklahoma, delivery hub - an important data point - fell for the first time in seven weeks.

Still, the focus was on total crude stockpiles, which hit all-time highs of 532.5 million barrels.

The oil minister of Nigeria, an OPEC member, was confident crude prices would stabilize after the producer group agrees to a supply freeze in Doha next month.

(Additional reporting by Ahmad Ghaddar in LONDON; Editing by Andrea Ricci)

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